How a foreclosed 4-plex turned into 43 units!

30 Replies

We have been investing for a number of years in KC and I have followed many of the success stories here on BP and thought I would contribute one of ours.  Its quite long but I hope instructive.

In late winter 2010 my partner located a foreclosed 4-plex in a great neighborhood in midtown Kansas City for $120k. It had been on the market for some time but was not moving. We watched the price drop to $100k within the month; it was apparent the bank was eager to get this off the books. We contacted the listing agent who was unresponsive so we turned to another broker/agent in the area and he got us into the property. The property was fantastic! 4 large two bedroom apartments with all new windows, HVAC but with two missing compressors; we could fix that; all new appliances and individual hot water heaters. There was some missing copper and the two upper balconies needed to be repaired/replaced. There were some homeless folks living on the decks in the rear of the property but the overall concern and the obvious reason why this property was not moving was the condition of the foundation.

The East wall bowed out significantly but it had been reinforced. At some point in the past steel supports and concrete pillars were installed in the basement to stabilize the property. At this time in the KC market, there was plenty of low hanging fruit and we assumed that most investors didn't want to bother with a property with foundation problems. All the while the price is dropping $20k per month.

We brought in a structural engineer and foundation expert. He inspected the building, made some comments about some things we might want to do but said it was sound and that we should not be concerned.

By now the price of the property was down to $60k and the whole time my partner is chomping at the bit to buy it; we had cash in hand after the recent sale of several SFHs. I wanted to wait a bit longer to see if we could get another $20k off but we went ahead and made an offer.

We offered just under $60k and it was accepted. All cash close and quick. Once we closed, we replaced the two front balconies as they were in rough shape. We tiled the bathrooms and kitchens, replaced two missing compressors, repainted and repaired various drywall and carpentry issues and refinished the hard wood floors that were under carpet when we bought the place and we fenced in the back yard. I seem to recall replacing a hot water heater as well.

All in all this ran close to $40k and was all funded out of operating income from other properties. We rented the first apartment for $700 within 6 months and the rest rented within a few months after. Each subsequent rental rented for more so that the property grossed nearly $3k per month with no mortgage and water as the only owner provided utility.

Jump ahead a two years or so and we took out a line of credit against the property in the amount of $100k and bought an off market 12 plex in the Union Hill neighborhood in KC. Here is where having a broker with lots of personal contacts in your market is worth gold. They asked for $450k and we countered at $400k. They came back at $425k and we countered their counter for $415k which was accepted. Beautiful cash flowing property in a highly desirable area with below market rents. The management at the time was getting $5 a year increases in the rent!

The inspection came back with very minor issues and based upon our analysis of the property, it would have taken a heck of a lot to make us back out. We closed and made some minor updates. Rents were increased over the next year and a half and the only thing we did to the 12 plex above and beyond basic maintenance was to repair a gutter and replace one furnace. Home run!

We then sold the 4 plex for $210k, a pretty solid return, and quickly found a 15 unit in midtown KC through yet another broker we had done business with previously. We were the first ones in the property and made an offer on the spot. This was a gem. Out of town owners with a local property management company that couldn't manage a tent at a Boy Scout camp. Rents were too low and had not moved in years. Fit and finish was ok but given the market, a few updates and upgrades would bring substantially increased rents. Gross income when we bought it was around $64k; its now over $90k trending towards $100k.

This year we sold the 12 plex for $559k! Nearly $150k more than what we paid for it and we put virtually nothing into the property. The value all came from solid management, increasing rents and keeping expenses low. We self manage by the way.

We 1031'd the proceeds and have an incredible 14 unit River Market property under contract for just over $1.1. Once again, knowing a broker with lots of contacts is key. He brought this to us before it went on the market. We paid asking price but our analysis shows plenty of room for rent increases. We calculate there will be $17k per door on the back end along with great monthly income.

So here is a success story with plenty of lessons to boot. Lessons by the way that I learned the very hard way.

Know your market and rents; too many PM's are content to get less than market rents since they believe they will be quicker to rent and the percentage difference between a $500 rental and a $600 rental is pretty small to them and not worth the effort. We are seeing month over month increases in rents in KC right now. If you self manage, check the rents around your properties and make sure you are right up there; unless your property stinks.

Make your property shine. All of our properties have hard wood floors and it makes a huge impression when someone walks in for the first time. We bought our own floor refinishing equipment and DIY. But even if you hire it out, you will most likely only need to scratch and poly between turns so won't need to constantly have a floor crew working.

Don't be afraid of the way a property looks. Spend a bit and get an expert to evaluate and inspect. You might find it looks worse than it really is.

Always negotiate up from your starting price. Don't work down from the seller's. We saved $35k when we bought the 12 plex.

Most importantly, build your relationships. Several of our best deals have been brought to us by brokers who we work with and who have strong relationships with property owners in the area.

And for anyone doing the math, we don't own all 43 units now - we owned and sold some on the way.

Best of luck* investing!

*(There is no luck! Just hard work!)

Chris,

Do you know/remember why the east wall on the 4-plex was bowing?

Drainage issues around the building perhaps? Water intrusion?

Thanks for a great story!

Awesome story and very inspirational! Wish you continued success. 

Juan Vargas, GenWealth Capital Group

@Chris Harrington

I love that story, making things work in KC!!!!!

I'm sure it was pretty hard giving up those deals, but it is great that you were able to roll them over into bigger and even better deals. That story about the 12 plex in Union Hill is just great. Poor management can make or break any deal.

[email protected] | 402‑965‑1853

That is a great story.  Congrats!  We have our first four plex that we bought for a great price, and now have about 40k in equity that I hope to parlay into something else soon.  I am really hoping in the years to come we can come across a few great deals as you did in your story.  Keep up the good work!

Hearing this from another local KC investor is awesome! Going to be going this route myself in the near future.

Great information Chris.  Thank you for sharing your experiences and sharing what you have learned along the way! Keep up the good work! 

Great story, thanks for sharing. Awesome job and something to work towards.

Do you mind sharing what you bought the 15 Plex for? I don't see it in the story unless I missed it. 

Thanks,

Melvin

Originally posted by @John O. :

Chris,

Do you know/remember why the east wall on the 4-plex was bowing?

Drainage issues around the building perhaps? Water intrusion?

Thanks for a great story!

 Hi John,

To be honest I don't know why the foundation was bad. The property was not in a flood plain and was in a long developed area of town.  Perhaps age, long term settling or build poorly.  

Appreciate your comments!

Originally posted by @Melvin Granger :

Great story, thanks for sharing. Awesome job and something to work towards.

Do you mind sharing what you bought the 15 Plex for? I don't see it in the story unless I missed it. 

Thanks,

Melvin

Melvin,

We paid nearly full price - in the mid $400's.  There were several other buyers scheduled to see it that day but our relationship with the selling agent got us in first.

A property scale-up success story and a buyer's agent success story to boot!  Thanks for posting and congrats @Chris Harrington !

Thanks Chris. That's a pretty strong Cap Rate around 14%, pretty awesome find. Thanks for sharing the story it's truly inspirational. My wife and I have purchased a foreclosed home, done the rehab, and have it on the market now to sell. Hopefully we can turn that into a success as you have. 

Thanks again,

Melvin

@Chris Harrington absolutely loved reading this story! I am inspired by the fact that you kept moving forward, each on to a bigger and better property. 

Question- I am trying to build relationships with brokers as well in the area(s) that i currently own in. How do I build these? I work with one agent who I am setup on MLS with and I buy all my properties through him. I would like to find out about the off-market/pre-market deals like the ones you mentioned, which would mean the brokers KNOWING the area and the people. How do I find these people? where do i start? any tips/guidance is appreciated.

Thanks! 

Congrats!

Great job, thanks for sharing!

Great job!! What is the one thing that you do differently than other management companies besides the whole rent thing? 

Seems like you buy in great area's and put the work in to make the quality rentals that demand top dollar?

Paul

Chris Harrington CONGRATS neighbor! Let me know next time when you will be up to sell something :)))

Excellent article!  I usually am disappointed in BP "success" stories because they lack detail.  Your article did a good job of explaining what you got, what you had to do which made it a success, and included nice tips (ex. broker relationships).  Other contributors should follow your example when posting their own success stories on BP.

@Chris Harrington  how long did you hold the 4-unit and 12-unit until you saw the appreciation.  Did you have that planned out from the beginning or did you watch to see when you felt it was the right time?

Thanks!

Your achievement is my next goal! Thank you for your taking the time and illustrating your success. 

Great story... Very motivating! Much success and many blessings with your business and future deals. 

Thank you for taking the time to share your story.

For people like me who lack the imagination it’s a great motivator for getting started. Please continue to share your successes. I wish you many more deals.

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