The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
In today’s episode, I wanted to present a case study on successfully forcing capital improvements and increasing rents to generate real appreciation in your properties in 12 months.
Now, there’s one thing that you have to prepare for on a project like this: an increase in vacancies. And short-term vacancy means you’re bringing in less income. But this is a short-term pain for long-term gain approach.
In this case study, I’ll show you how our 10-step process helped us turn over 140 units in less than a year, adding $6 million in real appreciation while keeping our investors happy with their quarterly payments.
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Key Takeaways with Josh Cantwell
- How we spent $2 million and turned 145 out of 296 units in 12 months.
- How these improvements created $6 million in real appreciation.
- The full 10-step process to complete the capital improvements efficiently.
- Things to be aware of like the increase in vacancy rates and how to keep payments flowing to your investors.
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Josh Cantwell: So, hey there, guys. Welcome back to Accelerated Investor. Hey, this is Josh, your host, and I’m so, so fired up to be with all of you guys today as always. And today what I’m going to reveal to you and show you in this podcast and in this training is how to force CapEx improvements, massively increase rents, and force real appreciation in your multifamily apartments using 10 simple steps in less than 12 months. That’s what we’re going to talk about today on Accelerated Investor.
Josh Cantwell: So, hey, guys. As I alluded to in the intro, I wanted to spend some time today walking through a case study with you. And what I’ve seen in our apartment deals over the last three or four years is planning for and forcing massive appreciation within the first 12 months of a deal and understanding that we’re going to create some vacancy on purpose in order to execute our value-add capital improvement plan in a very, very, very short amount of time. So, again, we’re going to talk about how to force the CapEx improvements, massively increase rents, and force real appreciation in multifamily apartments. Now, we’ve been very successful at doing this inside of 12 months. I’ll give you a very quick example. We bought a property called Stuart House. It’s a 296-unit apartment complex. We bought it for 16.3 million. At the time we bought it, it was 87% occupied, which means it had about 42 to 43 non-occupied essentially down units when we bought it. When we bought it, we immediately went after full turning, hard turning those 42 to 43 down units. Then we set very expensive renewals to the residents that were there upon their renewal to either pay a lot more or move out.
Then we turned those units, then we leased those out. Then the next time more renewals came up, we sent again expensive renewals to the next batch. Those residents either paid a lot more or moved out. We turned those units, leased those up, and then the next month we set again another batch of renewals and we did that for nine or ten consecutive months. And here’s the end result. Within ten months of owning Stuart House Apartments, we’ve spent over $2 million. We have turned 145 units out of 296. So, think about that. We’ve turned 145 units in less than ten months. That’s about 15 units a month of turning. We spent $2 million in ten months. That’s essentially $200,000 a month of capital improvements that we’ve spent. On top of the units, we also spent about 200,000 on the boilers, about 300,000 on windows, and at least another $100,000 on all the commons, and another $50,000 on renovating the management office and turning it into our HQ. We did all of that inside of ten months. While we were doing that, the occupancy dropped down to about 76% and we were bleeding cash. And what I mean by that and bleeding, I actually say that in a good way, we were bleeding cash because there wasn’t enough cash coming in to pay for the expenses, the debt service, and the preferred return to investors.
Well, what we ended up doing then is after this ten months was over, what happened was is that the CapEx, the construction finally caught up to all the expensive renewals that we had sent out, less and less and less people moved out of the property and more and more people stayed. We signed up more and more leases. And today I’m happy to report that we’re over 95% occupied. Think about that. We took the building from 87% occupied at purchase down to 75% to 76% occupied at one point back up to 95% occupied inside of ten months. And here’s what I mean about real appreciation, real forced appreciation. When we bought the building, it was making about $150,000 a month of gross income off the rent roll. The average rents were about $600, $650, and we were bringing in about $150,000 based off of the seller’s financials, the seller’s T3, the seller’s T12 about $150,000 a month. Right now, as we sit here and as I record this in March, we now are over $220,000 a month on the rent roll, 220,000 a month. So, think about that. We went from 150,000 to 220,000. If you take 220,000, you divide by 50%. You get a 50% expense ratio, divided by a six cap. That puts the building value at about $22 million. Well, just ten months ago, we bought the building for 16 million.
So, using that example, what steps go into this? So, step number one, because first of all, you have to underwrite at your takeover. Step number one is underwrite for 75% to 80% occupancy in your first year and determine how much cash bleed you’re going to have. So, underwrite for that 75% to 80% occupancy and underwrite for short-term cash bleed, and make sure that you have enough cash set aside in an operating account. It’s like an interest reserve to cover your expenses, your debt service, and your pref payments to your investors. See, my investors like whether it’s a 6-pref, 8-pref, 10-pref, they want to get paid every quarter regardless of if the property falls at 75% or 80% occupied, regardless of whether the property is bleeding cash. So, we underwrite for that short-term cash bleed. We set the money aside on an interest reserve account so that we can still pay them their pref return. Step number two, buy the building. Step number three, turn the vacant units immediately. So, just like Stuart House, just like Marshall Place, just like Brookside Oval, Brookside Way, Shady Cove, all this Valley Park, Valley Plaza, Chevy, Maple, all these buildings that we own, we turned the vacant units immediately. That’s step number three.
Number four, turn the commons and add amenities so that your residents can see that you are investing in the building, you’re investing in their experience, you’re investing in their livelihood. Now step number five is critical. Send expensive renewal notices to residents that are at their renewal. Usually, that’s every 12 months. Send expensive renewals to those residents to either pay significantly more or you would expect them to move out. And now you’ve turned the vacant units. You’ve turned the commons. You are leasing out those units that you turn. The commons are nicer. Maybe it’s LVP flooring, maybe it’s paint, maybe it’s new LED lights, maybe it’s artwork, maybe it’s the pool house, maybe it’s a dog park. You’ve added all those kind of things. And now the existing residents that are on a rent and are coming up for renewal, they’re seeing, “Wow. Look at all these improvements that they made. Look at the dog park. Look at the barbecue grilling station. Look at the new chairs. Look at the new awnings. Look at the new pergolas. Look at everything that they’ve done. Look at the new carpets or paint or LEDs in the commons. Maybe new laundry rooms, more efficient laundry.”
So, step number five, when you send those expensive renewals to those residents, they are going to second guess moving out because they’re starting to see the improvements that they wanted. So, they’re either going to pay a lot more because they like the improvements or they’re going to move out. And this is where in step number five, you should expect to drop down to about 75% to 85% occupancy. Step number six, buy the materials in advance and have your contractors waiting to pounce on these new vacant units, these new renewals that don’t renew. I have the material sitting in a CONEX box or a mini mobile, have the contractors and let them know, “Hey, in about 60 days, we’re expecting vacancy. Be ready.” Step number seven, the day after there’s a move-out and they turn in the keys, start the demo. Make sure that you’re ready as soon as that unit turns in their keys. You walk the unit, you got to scope the work, and the contractor starts the demo. Even if it’s make-ready, maybe you’re just ripping out the carpet and putting in new LVP or maybe the carpets are going to stay, but you’re going to turn the kitchen, maybe the whole unit is going to stay and you’re just going to paint it and shampoo the carpets. Maybe you’re going to do a full turn and change everything. But whatever that scope of work is in step number seven, the day after the move-out, start the demo.
Step number eight, it’s going to take about three weeks to full turn a unit, if it’s a full turn. Full turn meaning you’re doing the whole kitchen, the whole bathroom, the carpet, the paint, the flooring, LED lights, maybe appliances, maybe washer-dryer, all that stuff. It’s going to take about three weeks end-to-end and be aware that the last 10% of every unit, the punch out is where the slowdown happens. It’s walking the unit, it’s punching it out, making a final punch-out list, and then getting the punch-out done so it can be turned over to leasing. Step number nine, place the unit back into service. At this point, the unit’s been turned, the commons are all done, and now we turn it over to the property manager or the leasing agent to lease it out. And this is where we’re going to see that $200 to $400, in some cases $1,000 or more increase in the rent from a classic lease to now a full-turn lease. And we’ve started to force that appreciation. And finally, step number ten is to rinse and repeat steps five, six, seven, eight, nine so that you lease up quickly, you turn units quickly over 10 months, 12 months, and get that property back over 95% occupied.
And that is exactly what we’ve done with Stuart House over the last ten months using that process. That’s exactly what we’ve done to move classic rents and classic leases and move people out, increase the rent, increase the rent roll, and move the income from 150,000 a month to 220,000 a month, increasing the value of the building from $16 million to nearly $22 million in less than 12 months.
Josh Cantwell: Well, guys, there you have it. If you enjoyed that episode of Accelerated Investor, don’t forget to subscribe, like, rate, review, and don’t forget to get your tickets for our upcoming event Forever Passive Income Live at ForeverPassiveIncome.com. And also, if you are an intermediate to advanced investor and you are looking to share best practices in our Mastermind coaching and partnering program, go to JoshCantwellCoaching.com and submit your application there. We’ll see you next time.