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How I Transformed My 10-Unit Apartment Building From Financially Failing to a Stabilized Asset

Ben Leybovich
11 min read
How I Transformed My 10-Unit Apartment Building From Financially Failing to a Stabilized Asset

The primary function of a human brain is to learn. The progress — and indeed survival — of the human race depends on it. In spite of us real estate investors not exactly being the best and the brightest of what humanity has to offer, we too are hopefully capable of learning. Well, most of us anyhow…

Today, I am going to tell you a story of how I’ve succeeded in one battle, but having done so learned that if I continue fighting in this manner, I will undoubtedly end up losing the war. They call it falling forward, and I am particularly good at that.

Symphony 10-Unit

This is a story of one of my acquisitions. Those of you who have been following me for a couple of years must remember an article I wrote some time ago titled “How I Bought a 10-unit with 1.5% Down – A Case Study,” in which I described the circumstances behind my purchase of a 10-unit building in 2013. Please read the article for full details.

Here is a brief synopsis:

Symphony is two 5-units sitting next to one another. It’s in a subdivision, which lies in one of the two most desirable school districts in my town. The subdivision is not too old, having been constructed in the ’80’s. Ninety-nine percent of all dwellings in this subdivision are SFRs, with only a few other apartments in a duplex/triplex configuration.

The buildings themselves are 1980’s vintage. The units are all quite large 2-story townhomes. Four units out of ten are 2-bed/1.5-bath, and the rest are 2/1. The units are all-electric and are sub-metered. The water service is sub-metered to each unit as well. The sewer and garbage are billed to the owner.

Related: How to Buy a Small MultiFamily Property: A Step by Step Case Study

The condition of the buildings at the time of purchase was just OK; there were no crumbling basement walls, no broken windows, no 2-foot holes in the wall. I thought that there was about $15,000 – $20,000 of delayed CapEx in total, and my plan was to resolve all of it over the first couple of years by basically re-investing the cash flow. All of the units were full and leased-up on 12-month leases.

I thought that I was plenty conservative in my underwriting of Symphony. In fact, this was my most conservative underwriting to date. My underwriting resulted in an eventual purchase price of $373,500.

My financing package included an institutional portfolio note for 70% of the purchase price, as well as a private note for 25% of the purchase price collateralized with a blanket. This left me having to come up with 5% — the commercial lender insisted that I have some skin in the game on this one even though they knew that it’d be nothing for me to finance 100% same as I always do. I agreed, mostly because having done the math, it became clear that after all of the pro-rations and credits, I needed only about $5,000 out-of-pocket to close.

Thus, I purchased a 10-unit for $373,500 with 1.5% out of pocket… close enough to nothing down, I thought.

What About Cash Flow…?!

The cash flow, according to my “very conservative” underwriting, was to be about $1,000/month ($100/door) with my financing package in place. However, the reason I bought the building was because I saw some ways by which I thought I could push that number up to $1,250 – $1,500/door/annum – that was the plan…

2013 – Year 1

I bought Symphony in February of 2013, and as such, I had owned it for 11 months in that calendar year.

Question: How well do you think I did?

Answer: When I did my taxes that year, it became painfully clear that although I hadn’t lost money, I might as well have. Indeed, $3,000 was all I cleared on Symphony in 2013. I spent over $15,000 on CapEx right out of the gate. I encountered more evictions than I anticipated or had underwritten, which came with many more months without rents coming in than I’d thought would have been possible.

As it turned out, I wasn’t merely re-investing cash flow that year at all; indeed, I was borrowing from myself, and then slowly getting paid back, and while the building did pay me back in that first year, I never want to be on that roller-coaster again… extrapolate that!

In the middle of all of this, I remember doubting myself and my decision-making process as it relates to underwriting and real estate in general. I remember telling Patrisha, Why do I even bother…?! Granted, any time we buy a destabilized asset, there is an expected period of hard work and financial strain. But once this heavy lifting is done and the asset is stable, which in my previous experience had always been 3-4 months, the cash flow becomes much more stable, predicable, and passive. Eleven months into this deal, I was starting to wonder whether Symphony was going to ever turn the corner into behaving as a stabilized asset.

Thankfully, it did…

2014 – Year 2

Following last year’s fiasco, I put in place some rather rigorous tracking. I hadn’t realized how poorly the building had performed until my CPAs prepared our taxes. There was a lot of money flowing in and out on a monthly basis, and it “seemed” like I was doing better than that. I knew that I was working hard and invested a lot of my floats into the rehab, but I had no idea until very late in the game that year exactly how poorly I had managed this process.

This was not only unacceptable, but it was stupid! After all, we buy real estate in lieu of other investment vehicles specifically because it puts us in control and allows us to respond quickly to the realities on the ground. I completely missed the boat on that, and it was time to change my systems!

Nowadays, in the beginning of each month I check the trailing financials for the previous month and year to date P&L — for every property. I know exactly how every property is performing, how every unit is performing, and why. And from this, I am able to understand in real time which crucial changes are necessary. I am able to be proactive!

Current Financials

I can tell you that T12 P&L in 2014 sits at about $12,500. I went from $3,000 to $12,500 — not bad. The building is full with paying tenants. I haven’t had a delinquency in 6 months. Symphony is finally starting to behave like a stable asset.

The NOI in 2014 — and I am including all of the CapEx in that figure — sits at about $42,000. Further, there are a few points to note here:


Having spent more than $15,000 on CapEx in 2013, this year I spent $7,500. I am definitely moving in the right direction relative to getting control of the deferred maintenance, but I am not there yet. The stabilized CapEx on a building like this should not exceed $400/door/annum, meaning that once Symphony is fully stabilized, I should not need to allocate more than $4,800/annum for CapEx.

I am going to be conservative and project being able to operate Symphony in 2015 with $6,000 of CapEx, and if so, I should see the cash flow increase by about $1,500 relative to 2014, bringing it to about $14,000. This should also drive my annual CapEx-inclusive NOI to $43,500. And I do think that those are achievable numbers in 2015 relative to CapEx.

Gross Potential Rent

From looking at my T12, I know that I’ve left at least $3,000 on the table. I know which units are at fault, and I know why. More importantly, I am pretty sure that I can fix it, at least to some extent. I am going to assume that I can pick up 50% of that in 2015 — $1,500, which will further improve my annual cash flow to $15,500 and the NOI to $45,000.

Segue: Not that it matters much to this conversation, but NOI of $45,000 justifies a value of $450,000 at a 10% Capitalization Rate. I bought Symphony for $373,500. My current outstanding debt against Symphony is about $355,000. This means that I can stick almost $100,000 on my balance sheet — just an added bonus to go with the cash flow…


I financed Symphony, as you know, at 100%. The cost of the second-position note is about $700/month ($8,400) year. It’ll take me some time, but I could pay it off organically, at which point the entire $8,400/annum would flow into the cash flow. However, while this is doable and represents one exit strategy for paying off the private note, this would require substantive re-investment of cash flow, and due to time value of money, I would rather use this cash flow in other ways. And it looks as though I may have a better option.

I’ve been offered to refinance the building at 80% LTV, and have received a soft approval contingent on an appraisal. My financials, as well as the financials of Symphony, have gone through the entire underwriting process and have been cleared, which means that if Symphony appraises for around $450,000, which I obviously think that it will, I’ll be able to wrap all of the debt into one permanent loan. This will bring my outstanding balance back to where I started 2 years ago; perhaps $360,000, which is $5k more. But because the interest on the current second is substantively higher than the new note would be, I’ll actually lower my annual debt service by about $1,500+.

This $1,500 should find its way to my cash flow, potentially bringing the cash flow to $17,000 in 2015 and the NOI to $46,500. Thus, this is the goal for next year’s Symphony’s performance — $17,000 of cash flow. Granted, this is the best case scenario, and I have to do things right, but at the end of the day, it is achievable. I can’t ask for more; the execution is on me!

I’ll circle back next year to report on how well I did.

Lessons Learned

After having worked very hard and very smart for 2 years, I have not have reached my original value-add cash flow of $150/door/month. Seventeen thousand dollars, even if I can pull it off, will only be $141/door. There is a good reason for this failure to achieve my guidelines — LISTEN UP:

I did not underwrite the deal conservatively enough!

Last week I commented on Brandon Turner’s article entitled “How to Accurately Estimate Expenses On a Rental Property in 3 Easy Steps.” My comment contained a list of items that he “forgot” to include into the underwriting model he teaches you. His model is the same model I used for Symphony, with one exception – mine was more conservative. My final litmus test on any small-midsize multiplex has always been that it must cash flow $100/door under 100% leverage. This test is not something Brandon’s model accounts for, which makes it less conservative.

(Note from Brandon:  Since I’m too lazy to write an entire post in response to Ben’s post here, and since some folks don’t know Ben and I are great friends and he likes to pick on me, I thought I’d respond a few times throughout this post.  So, for starters, Ben is right – I don’t want $100/door under 100% leverage. I want $200, preferably. So, Ben, who’s  the conservative one now! 🙂 ) 

However, having lived through 2013 with Symphony, and having experienced the growing pains of 2014, I hereby declare that even $100/door under 100% financing is much too loose. Line items, such as Loss to Lease, Bad Debt, Concessions, and many others, indeed represent real dollars that could be in my pocket had I accounted for them in my underwriting, but are not!

Related: No Money Down Investing IS Possible: A Message to Naysayers & Skeptics

I’ll give you one example:

Loss to Lease

My handyman expressed a desire to move his family into one of the units on Symphony. Apparently, as he was finishing the remodel, his wife came by to drop something off and loved the unit. We’ve been working together forever, and he has always done good work for me. And besides, the process of stabilizing Symphony benefitted greatly from having me (through him) on site… extrapolate that!

But he asked for a small discount, and I gave it to him – about $1,200/year off of the market. This is $1,200/year that I could be making on top-line revenue, but I am not — it is a Loss to Lease (or non-revenue unit %, depending how you underwrite it).

Now, if you assume Gross Potential Income relative to the schedule of rents being $73,800, what percentage of that is the $1,200 that I am not getting due to this discount that I give my handyman?

Loss to Lease = $1,200 / $73,800 = 1.6%

Thus, the Loss to Lease due to this unit is 1.6%. Furthermore, there are still a few units where rents should be higher. My true Loss to Lease on Symphony is still running about 4%. I would have been well-served to assume that this would be the case in my underwriting, which assumed a value-add cash flow of $150/door!

And this is just one example of a very real cost that I did not account for in my underwriting for Symphony — I’ve learned! Brandon, when will you learn? And guys, which one of us are you going to follow: Brandon, who responded to me that just ’cause you’re buying a 4-plex and not 140-unit, you don’t need to worry about little things like costs of operating the building, or me, when I tell you that it doesn’t matter if you’re underwriting 4 units or 140? Operating costs of income-producing property are what they are, and not accounting for them is akin to sticking your head in the sand, while not knowing what all of the cost are is even worse. It’s plain stupid, and the fastest way to work too hard for too little, as I’ve had to on Symphony!

Learn from my mistakes!

(Note from Brandon, again: Oh, Ben, Ben, Ben. The funny thing is – we agree on this stuff almost 100%! I know you just like to give me a hard time, so let me clarify. Yes, I agree trying to analyze “Loss to Lease” on a 4-plex is a waste – because you shouldn’t have any (no resident manager needed on a 4-plex). If you do, you simply plug in the actual numbers you’ll be getting, not a hypothetical number that you use to analyze a large property. Loss to lease on residential is a non-issue.  OR you do as I do and include “loss to lease” as part of the cost of property management. When you analyze deals on a small scale, like your 10 plex, you did not include any calculations for property management. This is why you run into the trouble – because a property management fee would include loss to lease on a small scale like this.  And as for other operating costs – I think I accounted for them all and I made it very clear that every property has different numbers so it’s imperative to learn what the operating costs will be for the specific property you are buying.  Nice try, Ben! In the end, we both calculate these deals the same, we just lable things differently! But alas, you just like to ruffle my feathers! Well… we’ll meet again soon… 😉 ) 


I succeeded while failing with Symphony — I’ve won the battle, but I have realized that I will not win the war if every battle I fight is this close. I’ve sustained too many months of close calls in the first year, and in the process I have realized that in order to have longevity in this sport, I need to underwrite my deals to an even higher probability of success with a higher margin for error… ponder this, guys!

I am not happy with the privilege of owning real estate — not unless it makes me rich, and while Symphony was necessary and good enough as a learning tool, it is not how we get rich in real estate.

And then there is this: I work with private capital, which necessarily means that people trust me with large amounts of money. As a syndicator, I have to be able to project with a reasonable degree of accuracy the investment returns for my investors. As such, a swing of 3% makes a huge impact, and I would rather be too low than too aggressive!

Symphony is the best deal I’ve ever done, but it’s not nearly as good as the next one I’ll do! I’ve changed, my underwriting model has changed, my acquisition criteria have changed, and my outlook on investment real estate has changed as the result of Symphony.

BiggerPockets readers: Learn from this!

Have you been in a similar situation, and if so, how did you turn your property into a stabilized asset? Do you agree with my plan of attack outlined above?

Let’s discuss in the comments below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.