Skip to content

Posted over 5 years ago

A Transition to Apartment Complexes.

This is a follow up to my previous blog post.You can read that first here~No BS Real Estate Investing:A 6-year diary (with numbers and photos!).

I left you at the point where I was ready to make the transition from duplexes and four-plexes to smaller apartment complexes.

In the time since I wrote that blog post,I have acquired 3 small apartment complexes.I bought the most recent 2 apartment complexes 2 weeks apart in August 2018.

If I can do it, anyone can.

But let's back up.

As you probably already found out by now, my style is to do what most real estate authors don't typically do.I do not believe in skipping the details or the numbers, only providing vague outlines of how things were done.I believe that providing granular details of my deals should not mislead anyone into thinking they can just go and replicate things exactly how I did mine step-by-step.I do, however, think it helps people to visualize the process more lucidly and may be far more encouraging that way.

Sometime around June/July 2017,I had just pulled out about $200k in cash out of my one duplex (Acosta) which was a cash purchase BRRR that had done very well as detailed in the previous blog post.

The market however had turned really competitive in my preferred local market of Jacksonville FL especially given my strict criteria which were expressly the following:

1.Value add.

2.12-20 units.

3.Entry cash-on-cash ROI preferably above 5%

4.One roof.

5.Class B building

6.Grade B/C+ neighborhood 

7.Off-market deal/mom & pop owner.

As I got increasing frustrated about the opportunities or lack thereof from my usual local brokers,I was forced to break on one of my criteria-#7.

I turned to Loop Net.

As nothing interesting turned up with Jacksonville filters,I somehow typed in Cleveland OH.

Please note that Cleveland is a market I know fairly well as I had lived there for 5 years and still visit occasionally.So this was far from a random act.

Now I will say quickly here that I wasn't specifically considering out of town investing at that point. However, there had been quite a bit of buzz around the concept at the time on BP and I believe David Green's book on out of town investing published by BP was already being promoted around this period. 

In any case,I checked out Cleveland filters on Loop Net and found a property that checked almost all my boxes which appeared to have been listed same day.Let's call it "Lakeshore".

Normal 1542974636 Lakeshore

Now, most investors tend to view Loop Net as a site where good deals go to die.Me too.

However,I ran initial rule of thumb numbers on this listing and it was looking ok.

I called the broker and discovered from just talking to her for less than 3 minutes that she was not a commercial broker.She was more comfortable selling SFRs and had just been contacted by the sellers to find a quick buyer.That screamed two things to me:

1/I held the advantage as I had spent practically the preceding 12 months reading all the material I could find on apartment investing.

2/The sellers were probably motivated,

Here are the numbers:

Purchase-$690k

Private lender

Terms-6.5% interest 20% down 5 year term 25-year amortized.

This building was apparently 'fully rented' all through due diligence period but upon closing we found 3 vacant units.

However, it did not have a lot of deferred maintenance apart from the dated rubber roof which we had to repair at a total cost of $18k in the end.

The lenders did hold back $60k at closing which we got back upon inspection of the new roof.

It was private lending in the end as I did not have any relationships with local commercial lenders at the time and I needed to close quickly.

*My experience so far having owned this building over a year now is that it has been harder to achieve the much higher rents (in the high $700s) we projected as part of our value-add strategy.It has also been a year of mostly getting rid of the dead-beat tenants inherited from the previous owners.

We have however so far been able to get rents at least on par with market.The building has 9x1-bed units and 9x2-bed units.Rents were $550/$600 with previous owners, we have them at $600/$650 now.

So, fast forward to 2018.

My experience with Lakeshore was still fluid, live and ongoing.It had not been all plain sailing, but I felt I was beginning to get a hang of the apartment complex space. 

In any case,I read Ken McElroy's "ABCs of real estate investing" again (for the umpteenth time) since acquiring Lakeshore and the part where he stressed the difference between return on investment (ROI) and return on equity (ROE) struck a particular cord with me once more.

So I decided to execute some more cash out refy options on my remaining smaller multi-family assets to pull out dead equity.

These cash out refinance events were strategically executed over the 6-month period from January to June 2018 with the specific purpose of purchasing another apartment complex.

I only had about $300k in total.

However, an amazing thing happened.

My criteria of off-market deals was on steroids this time.I got a promising deal in Cleveland Heights that was off-market brought to me by my Cleveland broker.

Almost simultaneously, a lead we thought had gone cold in Jacksonville also suddenly became promising.The out of town owner was so responsive to a random follow up email that the deal had to be done.

Let's call the Cleveland property "Noble" and the Jacksonville one "Comanche".

Noble is a 16-unit townhome complex with a unit mix of 2-bed/1.5 baths x12 and 3-bed/1.5 baths x4.

It was going to need some work estimated at about $75,000 mostly cosmetic interior stuff to satisfy the point-of-sale requirement of the city as well as bring units to required standard to command market rent.

Normal 1542975455 2868 Noble Rd

Here are the numbers:

Purchase: $640k

Credit union loan.

Terms : 5% interest,3-year term,25% down,25-year amortized.    

Closing was delayed a couple of weeks as seller forgot to order point of sale inspection with the city and then went on vacation right in the middle of our due diligence period!

The building had been almost entirely occupied by Nepalese families who spoke no English.

We are currently in the process of executing our repairs while raising rent to market.The significant language barrier has been a major hinderance.But between younger children of tenants who are learning English and so can sometimes translate in broken English and the use of the often unreliable google translator,I think we are making slow progress.

Rents on purchase:

3-beds:$700

2-beds:$650

*Current rents:

3-beds:$900

2-beds:$800

**A quick cautionary note if you are looking to purchase in Cleveland Heights:

Water and Sewer bills are a crushing large percentage of your expenses.Request for the last 12 months of utility bills before closing!

I didn't.That was a mistake.

Nonetheless,I think all in all, we are on track to create a ton of value in this project.

Fingers crossed.

Comanche has an interesting background story.

Normal 1542977655 1130 Comanche St Jacksonville Fl Primary Photo

Remember the story of how I purchased "Alpha"?(Refer to the No BS diary blogpost previously referenced).

Anyway, the same out of state owner that sold Alpha owned a 12-unit complex just some 500ft away on the same street.

It is a set of 6 duplexes.he had initially briefly listed it for $800k at the time I made the all cash offer on Alpha.I'd offered $750k at the time.He did not even return my broker's email.He apparently received so much interest in the property at the time that he realized he was out of touch with current values in the neighborhood and immediately regretted entering contract with me on Alpha for such low purchase price.Investors were offering him above asking price for Comanche at the time.So he pulled the listing and held on to the property.That was July 2017.

Anyway, long story short, while we were under initial negotiations to agree a price on Noble above,I asked my broker to send another cold email to the Comanche owner.He lives in Tel-Aviv.

To all of our surprise ,he replied and said he would now be willing to sell.We quickly agreed the initial offer of $750k I'd made exactly a year ago in 2017.

During due diligence, it became apparent why he became suddenly more motivated.

Inspections discovered tons of deferred maintenance including HVAC units and roofs that were basically as old as the buildings themselves.They were built in 1986.He had been getting incessant tenant requests for major repairs that could no longer wait and he wasn't interested in shelling out thousands of dollars every month to complete the needed repairs.

We estimated we would need about $80k minimum in immediate repairs.We therefore went back to the owner and tried to negotiate the purchase price down by the amount of estimated repairs.Of course he balked at that and said he'd rather hold on to the property.

I returned to my calculator and worked out my projected numbers.I saw there was enough room in going to market rent that I could pull it off.I wasn't about to take the risk of him testing the market by listing the property again.

It would go under contract same day.

Of that I had no doubt.That was how hot the Jacksonville market had become.

So here are the final numbers:

Purchase price: $690k

Private lender

Terms: 6% interest,25% down,3-year term,25-year amortized.

We have just now completed all our planned initial repairs with new roofs, new HVACs and all new exterior painting.The tenants are super happy and rents have been raised.

Rents at closing:$600 

Current rents: $700 for existing tenants,$800 for the last 2 units just rented.$850 for an upcoming vacancy just listed.

Current occupancy:100%

Noble and Comanche closed within 2 weeks of each other in a whirlwind month of August.

It was brutal.

As a matter of fact, as if August wasn't crazy enough,I got an off-market triplex brought to me by my Jacksonville realtor bang in the middle of negotiations for Noble and Comanche.It was a deal too good to pass up.It was a red brick duplex with a detached cottage studio apartment.

Let's call it "Osceola".

Normal 1542981018 Osceola

Most duplexes in the area were selling for $280k-340k at this time.This triplex was available for $245k!

No major deferred maintenance.

Remember all my cash would be tied up in these apartment closings and if I had waited,I wouldn't be able to show a lender proof of funds.So I entered contract on the triplex using the same proof of funds I was using on the apartment deals.

When we closed in early September,I had to do a cash advance on my high limit credit card to close the deal.

Here are the Osceola numbers:

Purchase-$245k

Lender-Ameris Bank

Terms:5% interest,25% down,30-year fixed.

Rents at closing-$2550

Current rents-$2700

After closing all 3 deals,I rewarded myself by taking the entire month of October off.

I went on a tour of ancient kingdoms spending time in Rome,Naples,Sicily,Athens and a few insanely pretty Greek islands(Crete,Rhodes and some others I can't spell),Jerusalem (including the Golan Heights),Haifa,Bethlehem, and Palestine.

I'm back now refreshed and ready to go again.

The one major lesson I think I can say I've learnt without a doubt since acquiring these apartments is that apartment complex investing is so different from single family and smaller multifamily units like duplexes triplexes and 4-plexes.

It is a business.You cannot get away with taking your eye off the ball.

There is drama every month.You must frequently review your owner statements.

I now monitor expenses in real time on the owner portals provided by my professional property management team in both cities.

As with all other businesses, you live and die by your ability to maximize income and minimize expenses.

As a bonus tip,I will tell you that having experienced both sides,I probably would still lean on the side of my smaller multi-family buildings and their much less drama in future.

I hope this post has been useful to you.

If you got any kind of benefit from it, do leave a comment below. Your comments let me know people are reading, and motivates me to write more of these.

Most people don't even know the members blog page exists on BP.So let me know you're there.

Happy investing.

*And may your road be rough!

(That's a whole new blogpost to explain that) :)

Charles.



Comments (7)

  1. Great story. Thank you for sharing @Charles A.!


  2. Great blog.  Very inspiring and great info.

    Keep on crushing it :)


    Cheers

    Dragan


  3. Truly inspiring. fantastic! I'm actively looking for multi's. I'm glad I've found your blogs. 


  4. Thank you so much for your transparency! I enjoy reading your blogs


  5. Charles, isn't it just fascinating how brokers are all over you when you get a deal or two done?!!! Your story is extremely fascinating, and I appreciate the balanced approach of pain and pleasure of being a real estate investor. Thanks for sharing!


    1. Thanks,Ola.


  6. This is the follow up blogpost to the "No BS diary" blog as promised.

    Enjoy.

    Charles.