Best Deal Ever Show: $4.7M Profit on Very First Multifamily Investment

On this episode, we talk with Corey Peterson. Corey lives in Phoenix, Arizona, but works the markets in the Midwest, South, and East. He’s bought apartments from Ohio to Georgia to Louisiana.

Corey started flipping single-family homes in 2005 but transitioned into multifamily roughly eight years ago. He became really good at raising money, and when the market changed, he found a new way to spend it—buying apartments. He started studying multifamily investing, took some courses, and even went to events to dive deeper into multi-unit strategies.

This Investor’s Best Deal Ever

Being good at raising money, Corey ended up with a healthy amount of cash and wanted to make some big investments. And so, at his first multifamily event, he decided to stand up and announce he “had a crap ton of money and was looking for deals.”

He spent the next four days being approached by everyone and listening to pitches. He finally found a deal from two guys who had $150K tied up in a deal. They needed another $1.4 million and to close in 30 days. The property was in Greenville, South Carolina—so, Corey hopped on a plane and flew there to check it out.

The property had serious problems but was in a great area, just three miles from nice shopping centers. It was a C-class property built in 1970. Corey ran the numbers, and they made sense. He made a deal with his two new partners and ended up with 75% ownership of the project.

He operated the property for five years. During that time, he spent roughly $700K fixing it up—and eventually bought his partners out.

Class C when he bought it, Corey had to deal with a fairly extensive drug problem at the property. He knew he had to clean the place up. So, Corey made friends with a local patrol officer and offered the location as a training site for drug-sniffing K-9s.

You can imagine the shock on tenants’ faces after receiving letters on their doors that their apartment complex had just become part of the local K-9 drug search training program!

Needless to say, two tenants moved out overnight. Other residents were grateful, and this was the turning point for the apartment complex to become a more desirable community.

The Rehab

Corey originally estimated around $650K in rehab expenses but ended up putting in closer to $700K. Once the drugs were gone, he started working on the property, updating the exterior and interiors, repaving and striping the parking lot, etc.

During the rehab, Corey realized the roof appeared to have damage from storms. The project manager said there was insurance on the property during the time of the storms, and they were able to open a claim, pay the deductible, and obtain $300K worth of new roofing from the payout.

(Talk about luck striking!)

Occupancy, when purchased, was around 79%, but it was not comprised of the best tenants. Corey managed to get it to 98% over two-and-a-half years. Rents went from $475/month to $625/month.

This is what Corey is really good at. He focuses on building a community, resulting in more stable, longer-term tenants. This means lower turnover, as well as less cost going into fixing and repairing units.

Why? When tenants see landlords repairing and updating the property, removing drugs, etc., they are willing to pay more because they love living there.

All in all, Corey held the property for five years, with $95K income per month. After that, he listed it for $8.8 million.

The Numbers

Purchase: $3.2 million
Rehab: $700K
Other: $200K
Sold: $8.8 million
PROFIT: $4.7 million

Corey reinvested the money from this deal with a 1031 exchange: He turned around and bought a $12.7 million deal, which now provides him with $450K in cash flow annually. Talk about leveraging a monster deal into passive income!

Lessons Learned

“Know the operating agreement!” Corey says.

Unfortunately, he ended up buying out his partners early on because of the dishonest way they changed the operating agreement at the 11th hour. Unbeknownst to Corey, even though he owned 75% of the business, his cohorts changed the voting rights to reflect 33% for each member (rather than voting weight based on ownership percentage). When Corey found out, he was understandably upset and set in motion his plan to buy them out.

Corey says it’s imperative to work closely with an attorney on any partnership and make sure the operating agreement is looked at carefully before signing anything.

What was your best deal ever or the best deal you’ve ever heard about?

Share in the comment section below.

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