The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
If you’ve done a few residential deals, but you’ve never bought an apartment complex or maybe you’re fairly new to multifamily investing, today’s episode is for you.
Today, I’m going to walk you through how big the perfect multifamily deal should be, what it should cost you, where you’ll find it, and the things you’re going to do to create unique value while you own it.
You’ll learn about some of the deals I’ve done in the past that meet these criteria, what makes these deals so good for investors looking to take the leap into multifamily, and why this approach to investing is so much more secure than rehab flips or wholesaling.
Key Takeaways with Josh Cantwell
- The three components that create a perfect first multifamily deal.
- Why I prefer to buy distressed properties–and so should you.
- How we spent a total of $2.9M on a multifamily complex and walked away with $1.1M in profit only 18 months later.
- The eight profit centers for multifamily real estate.
- Why the best deals cash flow as you make improvements.
Josh Cantwell Tweetables
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Josh Cantwell: So, hey there. Welcome back to Accelerated Investor. Hey, this is Josh. And today I want to talk to you about the perfect deal for new multifamily investors, the perfect starter deal for a new investor. Here we go.
Josh Cantwell: And so, hey, guys. Welcome back. Hey, it’s Josh. And today we’re going to talk about the perfect deal for a new multifamily investor. So, for those of you that are kind of intermediate to advanced residential investors, maybe new to intermediate multifamily investors, maybe you own a 10-unit or you own a 25-unit, maybe you own 100, 150, 200 units of residential, but you haven’t bought an apartment complex of any kind of reasonable, significant size. I’m going to describe for you the perfect deal for you to start with. I tell my members of my Forever Passive Income Maverick Mastermind that their first deal if they’ve never bought a large apartment complex, needs to be between 25 units and 100 units. That’s going to represent somewhere between $1.5 million and $10 million, and that’s where they really should start. So, let me describe for you the perfect multifamily deal. First of all, it’s going to be about 50 units. Number two, it’s going to be off-market through a broker relationship or off-market direct-to-seller, essentially a pocket listing. It’s also going to be something that has a value add component where you can force the appreciation.
We don’t like to buy things. I don’t like to buy things that somebody else just renovated and somebody else just stabilized and then I’m buying it and it’s already stable and there’s only kind of organic rent bumps. I don’t like to buy that stuff. I like to buy the stuff that’s distressed. And so, the perfect property would be somewhere between 40% to about 80% occupied and most of the units would be in classic condition. The rents would be at least $300 below market value and the price per unit would be somewhere between $30,000 a door and $70,000 a door. To me, that’s the perfect starter deal for a new multifamily investor that wants to scale up into multifamily deals. Also, the 50 units is important because that’s going to be a property value of between 2 million to probably $7 million or $8 million, which also means that you can be eligible for non-recourse financing. So, those are some of the characteristics of the perfect starter multifamily deal. Again, roughly 50-unit off-market rents are $300 below market value. It’s a value add. It’s 40% to 80% occupied. You can force the appreciation by leasing it off and doing your value add improvements. It’s probably a C class or a B minus property built in the 1960s, 70s or 80s. That is a perfect multifamily deal.
Now, let me tell you about one of these deals that I did. I bought a property off-market through a broker relationship, and it was a 50-ish unit deal that was sitting next to an assisted living complex. The current 50-unit deal was mostly 55 and over residents, but it was at retail rates. It was not part of the assisted living complex. It just was next to the assisted living complex. It was a separate parcel and so most of the residents were naturally a little older, 55 and over. The rents were $300 below market value and the property was sold for $1.2 million from the assisted living owner over to Nick, who was a real estate investor, was a residential real estate investor who bought it for $1.2 million back in 2020. Nick only owned the property for one year. Nick was in the process of renovating all of the units. He actually renovated 34 of the 54 units and then he sold it to us for $2.45 million in April of 2021. And so, when we bought it, there were only 20 of the 54 units that were occupied. It was about 40% occupied. Twenty of the units that were occupied were in classic condition. The 34 units were in the process of being renovated.
And so, when we made an offer to buy the building, we told Nick, “Hey, by the time we buy it and close on it, we want you to have finished the 34 units that were currently under renovation.” That way we knew we would have 20 classic units and 34 units that we could lease-up. So, we agreed to that. And so, when Nick sold the property to us, I’m guessing Nick probably made somewhere between $600,000 and $800,000 because he bought it for 1.2 million, sold it to us for 2.45. Between his closing costs, his renovation costs, some of his cash bleed, stuff like that, he probably made $600,000 to $800,000. So, when we bought the building, we were able to get it with a bridge financing. It was non-recourse bridge financing for 5.99% interest. You can’t get that financing today because rates have gone up but we bought it with a Lima One bridge loan. It was a two-year loan with two one-year extensions, a two plus one plus one. So, the strategy was super simple. Going to lease out the 34 units that Nick left vacant. We’re going to send renewal letters to those remaining 20 residents that were in classic units. Most of those residents subsequently moved out over the next year due to the rent increases.
We then turned 15 of the remaining 20 units, and that turn primarily included new LVP flooring. We kept all the cabinets and painted the cabinets. We kept almost all the appliances because they were in good shape. We just put in basic Formica countertops. We invested about $120,000 between the roof repairs, the landscaping, and improving the 15 units. Plus, we had a little bit of cash bleed until we lease the building out. We then got to 100. We closed on the building. We executed that plan I just described, and then we got to 100% occupancy in late 2021. At takeover, we were only collecting about $15,000 a month. So, we built into our budget some cash bleed. Then over the next 12 months, we were able to lease out those 34 vacant units, somewhere around $850 to $950 per unit per month, and we were able to stabilize it and get the income up to 42,000 a month, which was exactly what we had baked into the pro forma. We now felt that the building was worth 4.3 million. And then in the summer of 2022, we decided that we were going to put the property on the market, sell the building on market with the same broker who sold us the building.
But this time, instead of going off-market, we were going to run the process. We were going to run the marketing process. We got 8 to 9 offers, the highest of which was $4 million. All those interest rate hikes back in the summer of 2022 definitely tempered the offers, tempered the price a little bit. We thought we would get 4.2 to 4.4 million. We got 4 million. We executed a PSA at 4 million and we closed in October of 2022. And so, we owned the building for about 18 months. We sold the building for $4 million. By the time we were done, we were all in for 2.9 million and we walked away with $1.1 million of profit. Now, the reason why this is the perfect starter deal is because, number one, we only had to raise $1 million from private investors. We paid those private investors a 10% preferred return, plus a 1% kicker. It was exactly that 20 to 100-unit deal. It was exactly that $2 million to $10 million deal. We were able to get a non-recourse bridge loan for about $2 million. It was in a tertiary market that not a lot of other investors were looking for or looking at. So, there wasn’t a whole lot of competition to buy the deal. And that is a deal that almost any intermediate to advanced residential investor can pivot into multifamily and do a deal just like that.
And so, if I could wish upon a star, if I could wish upon a star and say, “You know what? I would wish that every single one of our listeners, every single one of our subscribers, every single one of our coaching members, every single one of our mastermind members could do their very first deal, I would wish upon a star that this is the exact deal that they would do.” And the reason because is I’ve talked in other podcasts that there’s eight profit centers for multifamily real estate. Number one is the acquisition fee. On this starter deal, we were able to get a $73,500 acquisition fee. The second profit center is the asset management fee. On this starter deal, we charged $25 per month per unit which is about $1,300 per month, about $16,000 per year in an asset management fee. The third profit center is a guarantee fee. Now, we did not charge a guarantee fee to guarantee the loan. We did not guarantee the loan because it was a bridge loan. It was non-recourse. The fourth fee that you can earn from this kind of starter deal is a GC fee. GC fee is the general construction general contracting fee for managing the renovations. Well, we charge a 10% fee for the project but that basically covers our internal team that handles construction.
Okay. So, we don’t really make a profit on that but it covers our team, so it’s not coming out of our pocket. Profits under number five is a refinance fee. Well, we didn’t refinance, so we did not take that fee. Number six is profit splits from the cash flows. Well, this property, once we got the stabilization, had about $3,000 to $4000 per month of net free cash flow over and above the debt service, over and above the expenses, over and above the pref return. So, we could have taken that money out. We didn’t. We left it in the deal but we could have taken out that $3,000 to $4,000 per month once we were at stabilization. Profit number seven is the profit splits from the sale proceeds, which we only added up all the profits was about $1.1 million. And then finally, number eight is the property management fee, which is typically between 3% to 8%. We charge the property management fee but we were not the property manager. Property manager was our property management company called REM and they got the property management fee.
So, not only is it a deal that most new investors can stomach that they can do, that they can successfully raise money for, they can successfully sponsor the loan, they can successfully improve the deal but there was also six out of these eight profit centers that we were able to execute on. And so, the best thing about a deal like this for starter investors, the best thing about these types of apartments is that it cash flows while you’re improving it. See, as long as it stays between 75% to 85% occupied, you can sleep well at night. You can sleep well at night knowing that you’re not bleeding any cash. You see, if you’re a volume rehab flipper, right now, not only is your buyer pool lower, but your cost of bridge debt is higher. And with rehab flips or fixing flips, there’s zero cash flow while those properties are being rehabbed. You see, I didn’t always sleep well at night when I was doing rehab flips and wholesaling and building our private equity fund. It was very transactional and I had to wait for the next transaction to make a profit. The best thing about a starter multifamily deal like this is that it cash flows while you’re improving it and you can sleep well at night. So, I hope that you and if I could wish upon a star, I would wish that all of you do a very similar first multifamily deal just like this so then you can scale up into the 100-unit, 200-unit, 500 deals just like we have.
Josh Cantwell: And so, guys, listen, if you enjoyed this episode of the Accelerated Investor podcast, please subscribe, rate, review, and like the podcast. It would mean so much to me if you would subscribe, rate, review, and like the podcast. And if you are looking at doing your first starter deal growing into multifamily and going from fixed and flips to multifamily cash flow or going from a high volume flipper or wholesaler into cash flow or going from an intermediate advanced residential investor into multifamily, you can absolutely join us a couple of places. Number one, join us at our next Forever Passive Income Live. Go to ForeverPassiveIncome.com. There you can get your ticket for a few hundred bucks for our next virtual live event. Or if you’re ready to jump into our Mastermind program and like to apply to be considered for our Maverick Mastermind, go to JoshCantwellCoaching.com and there you can apply to be part of that mastermind. You do have to qualify through an interview process. All right. Otherwise, thanks for being here today on Accelerated Investor and we’ll see you next time.