Real Estate Deal Analysis & Advice

Why I Don’t Love Real Estate—But Just Acquired $20MM of Property in 6 Months

Expertise: Mortgages & Creative Financing, Personal Development, Landlording & Rental Properties, Personal Finance, Real Estate News & Commentary, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Business Management, Commercial Real Estate
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This is the story of how and why I acquired $20 million of property in half a year. 

Well, that’s not exactly the whole truth. My partner and I paid about $20MM; the repositioned stabilized valuation ended up being $30 million-plus.

Why I Invest in Real Estate

I started like many of you—with a diagnosis of Multiple Sclerosis.

No, not you? Hopefully not.

Most people look to real estate because they don’t want to work for “the man.” My good friend Brandon Turner (you know, the dude on the podcasts and webinars with an out-of-control beard who’s wearing a checkered shirt) tells the story of how he went from a bank teller, to house hacker, to landlord, to mogul.

Why did he do this? Because he didn’t want to work for “the man.”

My partner Sam Grooms went from a U.S. Securities and Exchange Commission-reporting CPA, to house hacker, to flipper, to passive investor, to syndicator.

Brandon and Sam weren’t working for the same “man.” Sam’s paid a whole lot more than Brandon’s, but in the end, that wasn’t enough. Neither of them liked to be paid (read: owned) by their respective men, and so both of them looked to real estate for a way out.

In my case, though, doctors told me that whether I like it or not, in a matter of time, I wouldn’t be able to work due to my diagnosis. So, for me, it was less about not wanting to work for “the man” and more about being unable. That necessity, more so than any desire, pushed me toward real estate.

Fortunately, I got good at real estate. And today, you would think that I love it.

But, dear friends, I have just one positive thing to say about real estate: it works!

That’s it. I’m hard-pressed to think of anything else positive about it.

It’s a stressful business. It’s at times a nasty business. Many of the situations and people you come across in real estate are not ones you’d choose.

When I first started, an experienced landlord told me, “If you stay in the game long enough, you will lose all hope for humanity.”

You know what, he was freakin’ right!

But, though I don’t exactly like it, I sincerely respect the power of real estate. It is simply not possible to ignore how effectively it can solve some of life’s problems (provided you know what you’re doing).  

So, here I am. I’ve acquired $20MM worth of real estate in six months, and that number is likely to at least double in the next 12.

Why I Chose Real Estate Syndication

There are many reasons I choose to syndicate apartments. Aside from the fact that it’s simply the best use of my professional skills, I discovered that single family is much more trouble than it’s worth. In most cases, for me, the numbers just don’t make it worth it.

Then, I moved on to small multifamily. I discovered that, while a bit better than single family in most cases, the numbers indicated these properties still can’t absorb professional management. I concluded I was essentially buying a job.

So, as you would expect, I began studying mid-size assets, thinking that the numbers would work better. I studied up.

Here’s the thing. Twenty-four to 60 units, which sort of defines mid-size, is likely the worst space to be in, in my opinion. In order to work as it should, this size requires more or less a professional—I would even say institutional—approach as it relates to management, maintenance, and financing.

And although that’s what it requires, you usually can’t absorb any of it into the operating expense because the size doesn’t produce enough income. As such, these “assets” oftentimes end up being a job that takes over your life.

In the end, there were a lot of structural components that forced me into larger properties. But an important, though perhaps a bit liberal-artsy distinction, is the caliber of people you get to be around at the institutional level.

I have worked very hard to gain an ability to live on my own terms, to not do things I don’t want to, to not share space with people I don’t enjoy, and to never be anywhere I am not wanted and appreciated. Well, in real estate, to attract high-caliber people, you’ve got to play at an institutional level.

This may sound a bit lofty, but I don’t live my life for real estate. I live my life for finer things than that. I live my life for the people in it. I live my life to make some sort of a difference.

Real estate is a multifaceted tool, and you get to chose how to use it. Use it the wrong way, your life turns to crap. Use it the right way, your heart sings. You pick!

The type of people I interact with at the institutional level make my life better—both more fun and easier. That’s what I want, and that’s why I syndicate.

vivid red and yellow apartment building with palm tree-lined property against blue sky background

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

What Does $20MM of Real Estate Look Like?

In this instance, $20 million looks like 215 units spread over two apartment communities in Phoenix.

My partner Sam and I closed on the first complex in August 2018. It’s a 98-unit value-add for which we paid $8.15 million, with a renovation budget of $1.4 million. We raised about $3.5MM of equity for that deal.

We closed on the second more recently. This one is a 117-unit value-add. We paid $10.75 million for this one, with a renovation budget of about $1.5 million. We raised $4.5MM this time.

The acquisitions are very similar in a lot of ways. Both are mid-80s construction. Both are located in what we call “the path of progress.” Both represent very significant repositioning opportunities, where we were able to underwrite $300 per door income bumps, of which about $175 is a recapture of the loss to lease and the rest is a renovation bump.

In both cases, we were able to underwrite, practically doubling the net operating income (NOI) in three years. Let me say that again: doubling the NOI in three years.

Finding Deals and Identifying Hot Markets

There are many voices out there yelling that the market is too hot and that you should wait to take action until another recession occurs. I disagree on many levels.

First of all, if any of you harbor the notion that the next downturn will in any way resemble 2008, you can stop with that nonsense. What we saw in the Great Recession was a once-in-a-generation event; we will never see anything like that again in our lifetimes.

The next downturn will be more cyclical in nature and constitute a flattening, not a cratering like we saw during the Great Recession. This means, if you can’t find any deals now, you likely won’t find them in the next correction either.

Secondly, you need to understand that a “deal” is defined by the delta to the market. In other words, whatever the market is, a deal is:

Market – Discount Margin = Deal

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Because of this, it doesn’t really matter what the market is doing. A deal is that needle in a haystack. While it is incredibly difficult to find, it is not contingent on the market, rather it exists in every market.

Phoenix, Arizona, USA downtown cityscape at dusk.

Related: Want to Find and Close More Deals? Get Better Data!

Real Estate Deals in Phoenix

Phoenix is different from other places. In most cities, you can find a mismanaged apartment building, where the rents are $50 or so too low, but there are a bunch of vacant units. In these situations, the bulk of the value-add is to simply manage the building up to stabilized physical vacancy, and then put some lipstick on it and bump rents $50.

Phoenix is different in that, for the most part, there is no physical vacancy. The population growth is so strong that even the most poorly managed buildings are operating at full occupancy.

Well, I can’t reasonably underwrite full occupancy, so I actually have to assume I’ll manage the asset worse. This is why the only way to add value in Phoenix is to increase rents by about $300.

For starters, I need to offset those higher economic losses in my underwriting against the current market. And then, I actually need the value-add to create returns for myself and my investors.  

Believe me when I tell you that finding an asset that allows for this is truly challenging. Add in the other hurdles listed below, and you begin to understand why Sam and I only hope for a few deals per year.

Here’s a list of obstacles we’ve identified:

  • $300 per door of value-add
  • Practically doubling the NOI in three years
  • 14% internal rate of return on a 10-year model (more on five- and three-year)
  • 1980s construction
  • Specific community footprint
  • Specific mechanical setup
  • Original interiors

Conclusion

Each one of the items in the list above begs for a post of its own. For now, I want to leave you with the following thoughts.

Real estate is not sexy. Real estate requires extreme levels of fluency. But real estate can certainly make you rich!

Deals are out there in any market. The money is in the delta. You just have to know how to identify it.

Are you waiting on the next recession? Or are you going after deals now? Do you prefer single or multifamily, and why?

Let’s talk more in the comments below. 

Ben has been investing in multifamily residential real estate for over a decade. An expert in creative financing, he has been a guest on numerous real estate-related podcasts, including the BiggerPockets Podcast. He was also featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Ben is the creator of Cash Flow Freedom University, the author of House Hacking, and a noted Multifamily Underwriting coach. Through his company, Source Capital LLC, Ben currently operates $40M of multifamily real estate. Learn more about him at JustAskBenWhy.com.

    The German
    Replied about 11 years ago
    I believe that the best real estate sales happen in the country side. It is a win-win situation and that is a market that can never slow down. In an area like rural Germany or France, the vistas are so beautiful that people can’t resist it. And the price is also pretty realistic. Nice article and all the 4 points make sense. Thanks 🙂
    Crystal Tost
    Replied about 9 years ago
    I find the advertising in other countries and in mediums that are not real estate related a waster of money and time. I think targeted advertising coupled with good pricing and proper presentation will get the house sold to a local buyer that is likely out there as we speak. Why focus on an audience that you are not even sure exists in mediums that are not targeted?
    David Grbich
    Replied over 8 years ago
    Setting a realistic list price at 10% below market may lead to a very lonely existence as a realtor – not many sellers in the California market have the equity to price 10% below market – but yes that should get the home sold. Great point overall – thanks.
    Mike McKinzie Investor from Westminster, CO
    Replied 7 months ago
    Once again Ben, you are 100% right on. I am so tired of SFR problems and managing nine different property managers. I think Apartment Syndication is my next step.
    Peggy Liu Specialist from Los Angeles, CA
    Replied 7 months ago
    Great post! Agreed. Money is always made in the delta.
    Dawn Michael Rental Property Investor
    Replied 7 months ago
    Delta ??
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Aurora, in mathematical terms, Delta is something we call any type of variance. What I mean to say in the article is that Real Estate, being an inefficient market, allows an investor to exploit the Delta between market (read the behavior of the majority of investors) and a given opportunity. If there is no Delta, then RE is no different from S&P 500. But, with paper markets being structurally efficient, while RE is structurally inefficient, we are able to look for, find, and capitalize on the Delta.
    Jay Harris Developer from Wesley Chapel, FL
    Replied 7 months ago
    In other words Delta = The opportunity to add value. In laymen’s terms.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Yes 🙂
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Yes 🙂
    Christopher Smith Investor from brentwood, california
    Replied 7 months ago
    I’ve actually made our incredibly well with SFRs, but they were extraordinary timing buys. I scooped up a number of properties in two states (where I live now CA, and where I lived before that OH) during the 2011 to 2013 crash time frame. In CA I picked up several nearly new properties (A/A- properties in A/A- neighborhoods) at roughly 35% of their pre-crash highs, in OH basically the same thing except not as many and at a discount not as significant. My current rental income yield (i.e., CF/FMV) is relatively modest in percentage terms, but tremendous based upon my original cost. Adding another 150% underlying appreciation to that (over appx 6 yrs), they have been to me a small gold mine. The mine’s yield is leveling off some, but I made so much upfront that its still a pretty good deal. I have two managers who do 90%/95% of the work, so while not totally a passive income source its pretty darn close. I manage the managers and we get along well. We get good responsible tenants with very few of the headaches that I hear come with Class B & C properties and war zone properties. I could live modestly off just the cash flow if I had to, however I still work a full time W-2 job for the time being. I’d like to participate in a larger venture since the current viability of adding SFRs in the current environment is a total non-starter (at least in my opinion). So for the time being, I’ve added to some REIT holdings until an attractive passive investment in a larger operation comes my way. However, I am not holding my breath on that.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Sounds like you’re on a roll!
    Jerry W. Investor from Thermopolis, Wyoming
    Replied 7 months ago
    Hey Ben, good to see you writing again. Looks like you nailed a good deal with persistence and diligence. Glad to see you doing so well. I am still piddling with a few SFRs. I have left the full time job, but have my own office I work in part time now.I am going to start experimenting with some flips and get up to maybe 40 units in the next year or so. While I don’t get out of town much, I am thinking of trying to move into a few more markets. You ever get lost and end up in Wyoming let me know we can have coffee or pie. I hope you kids are liking the new school and climate. Best of luck.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Somehow I never doubt that you’re going to land on your feet, Jerry 🙂
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 7 months ago
    Well done and well-written, Ben. I’ve both enjoyed and learned from your story. Just seems like yesteryear you were warning us about $30k midwest SFR pigs!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Well, Steve, I still warn everyone who’ll listen 🙂 Thanks for reading!
    Alissa Schmidtke Developer from New Orleans, LA
    Replied 7 months ago
    I appreciate this article. After 10 years of doing 1-4 family, I bought my 1st 15 unit apt complex last week. I came up with much of the similar criteria you have listed. I have many people around me that do 1-4 units who have supported me but I dont know anyone who does apt buildings. It reaffirms my decisions, thanks
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Alissa – thanks! Perspective is a funny thing. Time and circumstance are necessary ingredients. I don’t get too many comments on articles like this because perspective is a rather scarce commodity on BP for obvious reasons. Thank you for jumping in! Ben
    Daniel Suarez from Fairfax, Virginia
    Replied 6 months ago
    Hey Alissa, I just purchased a 16 unit for the first time as well as Oklahoma. Let me know if you wanna share ideas about management, financing, value add, etc.
    Saverio Nestico Rental Property Investor from Philadelphia, PA
    Replied 7 months ago
    Hey brotha. Great content. I read a few of your articles/posts. Interesting stuff. In another post you stated, “The debt was facilitated by Burkadia. This is a bridge loan; 3+1+1 interest only at LIBOR+312.” Could you please expand on finance structure of this deal? Thanks for your time
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Saverio – what can I say? It’s a bridge loan at LIBOR + 312 basis point. It was brokered by Berkadia with a lender out of Manhattan with whom I have several deals. It’s a 3-year balloon, with mechanics for +1 + 1. I will be out of it before then, more than likely.
    Roland Thompson Investor
    Replied 7 months ago
    What does the term “underwrite” mean in context of this article? Is it to evaluate risk?
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    To underwrite is to analyze, Ronald. Thanks!
    Lev Palei
    Replied 7 months ago
    “I started like many of you—with a diagnosis of Multiple Sclerosis.“ Was is just a catchy beginning? Anyway, the article basically boils down to SF, duplexes, 4-plexes etc being useless waste of time. The same goes for almost anything below 100 units. 100 and above can make you rich and, in addition, allow you to be with a bit less unpleasant people… Until now the BP musings sounded more optimistic. Well, maybe I need to read the article again. Good luck.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 7 months ago
    Haha I look forward to awesome commentaries, such as yours, Leva. Thank you! One – I started precisely how I described in that first sentence. Two – while most come to BP for optimistic musings, some actually come for realistic musings… I tend to write for the second group 🙂 Thanks indeed for commenting!
    Tammy Butcher from DC Metro for the moment...
    Replied 7 months ago
    Good read, Ben. I first came to this site, thinking I would learn more about single family investing. I soon realized that I might be more drawn to multi-family and then, finally, syndication. The trouble, I’m realizing, is that one must either be an accredited investor or have up to 100k liquid cash to get involved in syndication (which, in my case, would mean selling off some of my investments, bringing me back a step from getting accredited any time soon which I’m not willing to do at this point). So, I’m still involved mainly in “regular” investments and REITs at this point while I do more research. I’m not as sold on traditional real estate investing (single families), etc. as I thought I was thanks to this site and articles like these, however. I think I want more return for the work that would be required than what I would be actually getting.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Tammy, investing in syndication is not right for everyone. There may be a time when this becomes a good option for you. Keep studying!
    Carey Greiner Real Estate Agent from Bend, OR
    Replied 7 months ago
    It’s exciting to hear about your success finding the deal and making the deal work out well for you and the other investors. I’m currently finding deals with SFR’s even in a hot market like Bend Oregon. I’m running numbers on small multi family and seem to have found one that looks good. Now I’m working on financing, which is another good way to have someone else analyzing the deal for loan qualifications! Thanks for sharing your experience and insight!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    You are absolutely right, Carey. The bankers know more than we do, and have access to better data. If the deal is not good enough for them, it shouldn’t be good enough for you. Thanks so much for reading.
    Sarah A. Investor from Murfreesboro, Tennessee
    Replied 6 months ago
    Wondering what these statements mean. Thanks in advance! “…we were able to underwrite $300 per door income bumps, [of which about $175 is a recapture of the loss to lease] and the rest is a renovation bump.” **Especially the part in [brackets]. and “For starters, I need to offset those higher economic losses in my underwriting against the current market.”
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Sarah, those are very good questions!!! Unfortunately, the explanations would be much too winded for this forum. Just keep reading and studying!
    Daniel Suarez from Fairfax, Virginia
    Replied 6 months ago
    Thanks so much for the info! Do you live in Phoenix? Do you have the property managers chosen already? My main concern is that when investing in big properties out of state. (just got my first 16-uni accepted)
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Daniel, yes I live in Phoenix. Yes, we have 3rd party PM. With a 16-unit you are right to be concerned. My PM, for instance, will not accept anything under 100 units. So, for 16-unit you are going to need to fudge thing substantively. Good luck!
    Daniel Suarez from Fairfax, Virginia
    Replied 6 months ago
    Thanks so much for the info! Do you live in Phoenix? Do you have the property managers chosen already? My main concern is that when investing in big properties out of state. (just got my first 16-uni accepted)
    Asa Hunt Rental Property Investor from Dallas, TX
    Replied 6 months ago
    I enjoyed the post and you’re writing style. If you’re looking for another blog idea, going in to detail with supporting data for the claim of the next correction will constitute a flattening and not cratering would be a good one. Mainly because I hear something like this with every potential investor I talk to. “We’re at the top of the market, what about when 2008 happens again?”
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Asa, thanks. I have no interest in tangling with folks about the future. The 2 pieces of advice I can give you are this: – if you are hearing this from a lot of people, you may be talking to the wrong people. – since no one really knows, underwrite cash flows conservatively and realistically, with provisions to stay in for 10 years.
    Oscar J Osorio Investor from Marysville, Washington
    Replied 6 months ago
    Hi Ben, I must tell you, I first heard about you when you lived and did RE on Ohio, you wrote about the $30,000 SFH being a waste of time and resources; I thought you crazy and I didn’t like you very much. You backed it up with Data making me realize I was VERY wrong about you. You convince me to shift my strategy to Multi units and I will not go back to SFH, unless I’m going to hit a home run. Damn it here you are again and you hit it out of the park, thank you for that prospective and I will definitely pay attention and shift again. I have been following your writings and thoughts about RE, you definitely understand RE, I will continue following your point of view and advice in your writing, my best to you.
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Oscar, thank you indeed! I’ve not been writing very much at all. I write only when I have something to say that I believe is worthy of your time. I think I am at an inflection point. My own growth has taken me to a place where once more I have something new to add to the conversation. And here I am 🙂 Thank you!
    Matt Powell Investor from Bloomington, Illinois
    Replied 6 months ago
    Ben, I would love to know how to get started in Syndication. I have a 300+ off market apt complex and the investors/owners are thinking in the 12-17 million range. Is this something a bank can help me with finding the right investors etc? Thanks for the article!
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Matt, I literally don’t understand what the hell you wrote:) Wanna try again?
    Tamara Rodenbeck Attorney from Phoenix, AZ
    Replied 6 months ago
    Ben, as always love your transparency, directness, and intelligence in the actions. Much appreciated! So given that I’ve repeatedly heard you say that SF and small MF are tough to cash flow (or at least in class levels you’d want to own), do you still recommend Phoenix for the first-time investor? If so how and why?
    Ben Leybovich Rental Property Investor from Lima/Chandler, Ohio/Arizona
    Replied 6 months ago
    Hey! Thanks 🙂 The only thing I recommend in Phoenix for a new investor is a luxury house hack. Mine cash flowed $1900 this month. Friends of ours were visiting this week. My wife helped them buy their luxury house hack in the North part of town last year. They are doing even better than I. Why would you look at anything else…