Just bought a 140 unit property. Here’s how I financed it (thanks BP!)

94 Replies

Congrates --Brian : Great job --structuring a deal, raising funds and structuring the syndication --profit sharing. I do have some comments and questions --for the benefits of other BP members:

1 The total price is $6.3 million --including closing costs, reserves and capital improvements ?

2 Is capital improvements $600,000 part of $2.3 million raised ? Was this required by CMBS lender based on an Engineering Inspection ? Was this held in an escrow by lender ?
3 Did the lender required 5 % ( or 3 % ) set aside for management fees ?

4 Due Diligence cost - $16,000 seems low -- did it include --an appraisal, phase I Environmental , Engineering Inspection Report and Survey ?
5 $45 K / door for Class C --boarded up seems high --even for good area.
In Atlanta --you can get for $3000 , $5000 to $15,000 per key.

6 Cap rate under 10% seems low also-- Normally --If I buy or recommend
where it needs work --cap rate should be 12% to 15 % --after fixing and improving cash flow--SELL at 8 % to 10 % cap.

May be California and Houston is different.

7 I like the profit sharing structure with investors. Giving them guaranteed

8 % return. How did you arrange for sharing Tax Right offs--on
depreciation ? and how about recapture of depreciation when sold ?

8 Do you have a management company or onsite manager ?

Congratulations Brian!!! And thank you for sharing all the info on aquiring a property of this size!! Very inspiring for those that want to take things to the next level - me included!! You are so right, I can see how people can under estimate the cash needed to make a deal this size happen!! The only question I have that has not been answered or maybe I Missed it is (and if you don't feel comfortable answering it I totally understand) is how much did you have to come out of pocket with your own personal funds on this deal? Owning or being a part of a property of this size is something I'd love to do at some point! Once again, Congratulations and good luck with the property!! regards, Chris

That's great Brian!

Good transparent information and great posts to help us better understand how you were successful in this deal.

Appreciate the post, wish you many more!

Originally posted by Sharon Hiebing:
Thanks for responding to my questions, Brian. I'm so glad to hear C Classes aren't trading for $45K per in Houston (I almost had heart failure and was gonna start looking for a new area lol!). I had been told about $20-25 avg, so $10K and up is wonderful - I'll probably stick to C+'s cause I'm w/ you on area. My bad for doing the math with an "all in" number.

No problem, Sharon! I don't want to mislead you, though. Apartments trading in the $10K range aren't rentable. Expect to be all-in around $35K to $55K for C-Class in that market. If you buy for less, you'll still end up spending it in upgrades and capital improvements.

Originally posted by Nick K.:

I know you are in California so did you already have a team built in Houston and how difficult will this be for you to run from California? I'm sure you have a PM team but I'm just curious on how that works. Secondly, I know some syndicators charge management fees and/or acquisition fees that their investors pay to them. Do you do anything like this when you put these deals together?

And lastly, I'm just curious...how many other syndicates have you put together before this one? I'm just interested in seeing maybe your progression. Was your first syndicate a property of this size?

Thanks so much!

@Nick K. , Yes, I have a team built there so it will be simple for me to run from CA. I have an office in Austin as well as California which will help, too (my partner oversees that office). In addition to my in-house team, I have a third-party team: contractor, lender, management company, etc.

Yes, management fees are paid up through the ownership entity to the management entity. Up front fees were built into the capital raise, and ongoing fees are paid via cash flow.

This is not my first one of this size, and while this isn't the most expensive property I've done, it's the highest unit count (by 4!). I've done a dozen or two other partnerships in the multifamily space, self-storage, and single family. I started just like everyone else...small deals and bootstrapped funding.

Originally posted by Champak Shah:

1 The total price is $6.3 million --including closing costs, reserves and capital improvements ?

2 Is capital improvements $600,000 part of $2.3 million raised ? Was this required by CMBS lender based on an Engineering Inspection ? Was this held in an escrow by lender ?
3 Did the lender required 5 % ( or 3 % ) set aside for management fees ?

4 Due Diligence cost - $16,000 seems low -- did it include --an appraisal, phase I Environmental , Engineering Inspection Report and Survey ?
5 $45 K / door for Class C --boarded up seems high --even for good area.
In Atlanta --you can get for $3000 , $5000 to $15,000 per key.

6 Cap rate under 10% seems low also-- Normally --If I buy or recommend
where it needs work --cap rate should be 12% to 15 % --after fixing and improving cash flow--SELL at 8 % to 10 % cap.

May be California and Houston is different.

7 I like the profit sharing structure with investors. Giving them guaranteed

8 % return. How did you arrange for sharing Tax Right offs--on
depreciation ? and how about recapture of depreciation when sold ?

8 Do you have a management company or onsite manager ?

Hi Champak,

1. Yes, but I wouldn't call it "price" because this figure includes cash that will remain on hand, and deposits that we'll get back, etc. so not all of it is "spent".

2. Yes, it was part of the money raised, only $50K or so was lender-required and most of that was stuff I planned to do anyway. The lender is holding about $500K in an impound. That is strange because the repairs weren't required, but understandable because they loaned more than they normally would with the agreement that the excess would be held back. It gave me better leverage ultimately, so it was a win for both parties.

3. They didn't require it to be set-aside, but it was included in their underwriting. That was fine with me, because it was included in mine, too.

4. I must have got a good deal, because that was all-inclusive. It's also in line with the costs on similar previous deals. I had the previous survey so that was just an update, which saved some cost.

5. I'm sorry if I gave the impression that this property was boarded up, it's not, it's 92% occupied and in pretty good shape overall. The value-add is in improving the curb appeal, landscaping, and interior upgrades.

6. I underwrote over 100 properties before scoring this one, and none of those properties came anywhere close to a 10 cap, much less 12 to 15. If you are buying at those rates, keep doing what you're doing!

7. Investors get all of the depreciation. They'll recapture it, too, but to some degree we can mitigate that by attributing as much of the gain as possible to the land and not the structures. This converts some of what would have been depreciation recapture to capital gain. You can't catch it all, but you can soften the blow a little.

8. Both.

Originally posted by Chris Masons:

The only question I have that has not been answered or maybe I Missed it is (and if you don't feel comfortable answering it I totally understand) is how much did you have to come out of pocket with your own personal funds on this deal?

Hi Chris! Zero. I didn't mention that previously because I didn't want this post to be a guru-ish "you can buy million dollar properties with no money" type of post. The ability to do this is entirely dependent on track record and relationships, and isn't possible from a lending standpoint without experience. But since you asked... :)

I agree with Jose, this would make one hell of a case study!

Originally posted by Jose Enage:
@Brian Burke Yes, writing it up into case study (past and ongoing) would be great - to cover main points like: biz plan or objective coming in (turn-around/value play?), market cap rate vs. deal's cap rate, negotiation process, occupancy before and target after, exit strategy/s, how syndication was formed, selection of PM/local power team, ongoing asset management tasks etc.

@Brandon Turner may be a good literary writer but no one can tell this case story with the same completeness, conviction and in your own brand of project management as you alone can.

It would be cool if you can share with us specifically how you 'recruited' investors or cash buyers from the BP community to syndicate this deal. Thanks for your inspiring story!

Argh!! Another California buyer in Texas!! Just kidding of course, sounds like a great deal. I'm looking myself in dfw right now for 60-100 units to purchase through syndication and have had a few snatched away by cash buyers - from CA! Very frustrating how hot our market has gotten just as I'm beginning to make offers! Makes me feel better though that smart guys like you are still eager to buy at this point!

Brian....Outstanding job and all the best on this amazing deal. I also respect you very much for the thanks you've given to the BP folks who helped you on this deal. I've only been on BP a few months, but it has also opened so many doors to me as well with new partners offering great deals to our business along with new investors. I am so greatful to this site. It truly has been a huge asset to my business along with introducing me to some great people.

Best wishes on continued success,

John Rubino

@Brian_Burke, thanks for sharing and also for answering all of the follow-up questions. What I'm most interested in learning is how you stay clear of SEC issues when doing private fundraising? Do problems only arise with the SEC if one publicly trolls for money, i.e. through advertising etc.?

@Tom Lafferty , us darn Californians! What can I say, TX has the job growth and increasing population. CA just has nice weather and high taxes. :)

@John Rubino glad to see you are getting a lot out of this site, too. Being in a community surrounded by like-minded people is bound to produce knowledge and opportunity, and BP doesn't disappoint.

@Jim Farrell you can't "stay clear" of SEC issues, you just need to work within the boundaries. Any time you pool money from others, you are selling a security and you must play by the rules. It's not that hard (but it's also not cheap), you just hire a good securities attorney and they will keep you between the lines. You do bring up one good point about publically soliciting funds...you can't advertise (yet). Success grows from relationships and track record, not from an ad.

Brian,

Congratulations! I know I will never own a 140 unit building.

The idea that you and your investors are facing a 5 year balloon is to me unapproachable. "What if" would and has keep me from such deals.

Just figuring all of the numbers and the cap rate are based on financing at low interest rates. I just don't see low interest rates in our future. I know value on large commercial buildings is based on income, but just the same the income will be effected by for example a 10% interest rate.

At this time I have one commercial loan in place, just about paid off. The interest rate is presently 7.75% which can float to 10% based on prime.

I am one of those extra cautious guys, just don't like uncertainty. This is the reason I will always be a small landlord.

Just curious from where I am in the the valley looking up at you on the mountain top, what would happen if one rates went up, and two what is your plan on refinancing in 5 years?

I am interested in how this works on a large commercial property.

Those are valid concerns, @Dennis Treacy . Like you, I fully expect higher interest rates in our future. Given that we have bought this property for a below-market price we have a slight hedge built in already, but I've also assumed an exit cap rate that is higher than today's prevailing cap rates.

One significant mitigating factor is increased income as a result of rent growth, which is pretty significant in the area at the present time. This should help to provide enough insulation to allow for a refinance at year 5 if absolutely necessary. That is really a worst-case scenario, however, because our intended plan is to sell at year 5. A refinance scenario would only come into play if your scenario rings true, and cap rates have risen to such high levels that selling and recovering our investment became impossible.

Given our value-add acquisition strategy, it would take a pretty significant interest rate increase (coupled with increases in the vacancy rate and reductions in effective rent) to become underwater. I think that increasing interest rates will be fueled by a strengthening economy, which typically produces higher rents and occupancy (and thus income and value), but as with every investment there must be a plan B.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you