Anatomy of the Grand Slam: How I Made $800,000 on One Flip

Anatomy of the Grand Slam: How I Made $800,000 on One Flip

5 min read
Brian Burke

Brian Burke has acquired, renovated, and disposed of over 750 residential assets and 3,000 multifamily units. This includes over $500 million of real estate in several sectors: multifamily, single family, hospitality, self-storage, mixed use, and vacant land.

Experience
Burke has 31 years of investing experience with 20 years in multifamily. He’s performed underwriting, valuation, and title examination of thousands of properties for acquisition at trustees’ sales.

Throughout his investing career, he’s built homes, built self-storage, renovated a lakefront resort, and bought/renovated hundreds of homes and thousands of apartments. His largest acquisition to date was close to $50 million.

Burke has been a speaker at real estate conferences nationwide, plus various local/regional meetup/REIA groups in California and Washington. In addition, he’s been invited to speak at Google, Facebook, and Apple.

Accreditations
Licensed real estate broker in California

Press
Burke has been contributing to the BiggerPockets Blog since 2013. He’s also the author of The Hands-Off Investor: An Insider’s Guide to Investing in Passive Real Estate Syndications.

Burke has been featured on podcasts such as the BiggerPockets Real Estate Podcast (episode #3, #76, #152, and #378), on a BiggerPockets’ Facebook Live event, and on the FOX News Radio show “The Best of Investing.”

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Twitter @PraxCap
Instagram @praxcap
Instagram @investorbrianburke

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Gurus say it all the time: “there is huge money to be made investing in real estate. It’s so easy, in fact, that anyone can do it, in their spare time, with no money.” Yeah, right! The lure of big profits is what motivated most of us to get into this business. The absence of big profits is what motivates many to give up.

If over 20 years in this business has taught me anything, it would be that it takes hard work, perseverance, and a lot of practice to get it right. Many people never get it right. The difference is successful investors never give up; they keep trying because they have the drive to survive and the willpower to achieve.

Perhaps you started out thinking that you have to hit a home run on every deal. You don’t. Baseball hall of famer Babe Ruth only hit a home run 8.5% of the time and he struck out 15.8% of the time! Here was the key to his success: on more than a third of his tries, he connected with the ball and got on base. Imagine how history would have to be re-written if he had quit after his first strike-out!

Real estate investing works the same way. If you can hit a lot of base hits, you will have a very successful career. Every one of those hits is a building block to your success. I know, because I’ve had the good fortune of several hundred real estate “at bats”, resulting in my share of base hits, home runs and strike-outs. But those deals, good or bad, built the foundation of my business, and without that knowledge and experience, I wouldn’t have been able to hit the elusive Grand Slam.

I hope that sharing with you what a Grand Slam looks like (to me—your opinion of what a Grand Slam is may differ) will help you recognize one when you see one, and keep you motivated to grow your business and expand your comfort zone. A deal like this won’t be your first deal, but if you don’t keep your head in the game, it ain’t gonna happen!

Let’s Dissect the Deal!

In late 2010 I got a tip from my property manager that an REO apartment complex was on the market, had just fallen out of escrow, and the bank was anxious to unload it. This, by the way, is just one of the reasons why a good property manager can be worth their weight in gold. The asking price for the 54 unit complex was just reduced from $1,800,000 to $1,300,000. The previous buyer had been in contract somewhere near the original asking price.

After underwriting the financials, I concluded that the deal would only pencil at $800,000. I made the offer and it was quickly rejected. I tried to reason with the seller and explain that it was going to cost me $700,000 to fix up this property and my offer price was really all that the property was worth in its current condition. They wouldn’t budge, so I stood my ground and let this one go.

About a month later, I heard that the bank was becoming even more anxious. I called the broker and reminded him that I was still interested. The seller asked if I could increase my offer. “Sorry, I don’t bid against myself” I replied. A couple weeks later, the phone rings. We have a deal! I must admit, I wasn’t expecting that!

The property was just over 50% occupied when I took over. The empty apartments were in pretty bad shape, the exterior needed all new siding, wood trim, roofs, landscaping, repair of failed retaining walls, you name it, it needed it.

Financing the Grand Slam Flip

I financed the property with a $1,100,000 hard money loan and raised another $540,000 with a Reg. D private offering. The lender held back about $600,000 of the loan proceeds in a construction reserve account, to be distributed as the construction progressed. That left me $500K from the loan proceeds and $540K from the equity offering to close the deal and get started. Even though I had none of my own money in this deal, I cannot overemphasize that this financing structure is only possible with experience, relationships, and a track record (remember all of those base hits you are using as building blocks?). This is not the “no money down” strategy from Guru-Ville.

Within 12 months, the property’s brand name was changed, almost every apartment unit had been renovated inside, the exterior was completely renovated, picnic tables and BBQs installed, the landscaping was lush and green, and occupancy had risen from 55% to 97%.

The Results of the Grand Slam FliP

Rents increased from an average of $620 to $734, an 18% increase. After 3 months of stabilized income on the books, I listed the property for sale and within a month accepted an offer for $2,650,000. The property closed in December 2012. Start to finish, this flip took 22 months.

Here is what the numbers looked like:

Rental and Other Income

$723,191.65

Expenses

Property Management

$25,770.91

General/Administrative

$28,855.02

Marketing

$38,324.24

Payroll

$180,610.93

Repairs / Maintenance

$44,054.67

Utilities

$76,298.69

Contract Services

$32,918.61

Insurance

$12,884.96

Property Taxes

$33,136.38

Interest Expense

$240,534.68

Total Expenses

$713,389.09

Net Income

$9,802.56

 

Property Purchase Price

$800,000.00

Entity Formation

$24,326.00

Acquisition Costs

$15,645.00

Loan Fees

$63,006.27

HVAC/Carpet/Appliances

$150,051.86

Interior Improvements

$141,514.14

Exterior Improvements

$248,126.16

Furniture & Fixtures

$37,377.92

Landscape Rehab

$120,836.22

Carports

$3,130.00

Engineering and Permits

$1,450.00

Total Property Basis

$1,605,463.57

 

Sales Price

$2,650,000.00

Sales Commission

($104,167.00)

Credit to buyer

($120,000.00)

Closing Costs

($15,912.11)

Net Sales Price

$2,409,920.89

Less Total Property Basis

($1,605,463.57)

Plus Net Income from Ops

$9,802.56

Total Net Profit

$814,259.88

 

I wish I could say that the profit was all mine! Remember that I financed this deal without using any of my own money? The investors got a little over half of the profits. They received 185% of their initial investment back, making them a healthy 43% IRR. Sharing the profits is one of the sacrifices that we all must make when we want to get into bigger deals or grow our businesses beyond our own resources. I’m happy to share because part of something is better than all of nothing.

Three Key Takeaways for Your Business

  1. Not every deal has to be a home run to be successful. Many successful careers are dominated by base hits, and that builds the foundation you need to hit the elusive Grand Slam. Keep your head in the game, don’t ever give up, and you will hit one eventually.
  2. Some of the best deals come out of nowhere. Make sure that everyone you know, and everyone you work with, is aware of what you do. And use good property managers that have your best interests in mind!
  3. Unless you are an heir/heiress or imported money into your real estate business from another successful venture, private investors are critical to any growth strategy. Treat your investors well. Under-promise and over-deliver. Be honest and transparent, and communicate with them whether the news is good or bad. They will be there for you again when you need them.

Many investors hit some home runs, and once and a while, a Grand Slam. What is your favorite success story?

NOTE From the Editor: We interviewed Brian for the BiggerPockets Podcast and talked in more detail about the Home Run deal discussed in this post. Check it out here: BiggerPockets Radio Podcast 003: Getting Started in Real Estate and Raising Money with Brian Burke

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