My biggest deal ever... and it went bust. (sort of)

42 Replies

Hi BP Fam,

Previously I mentioned I was onto a large deal that I thought would be an absolute killer. Well...turns out things don't always work out as planned.

I'm not happy about the results on this deal that I've been slaving over since June but it wasn't a complete fail story so I'll share what I did here.

In April, I was approached with a large package deal of 15 units. Seller wanted $2.1 million. I offered $1.5m and some other guy came in at $1.7m  cash after I was led on for about a week. I was literally depressed for about two weeks about losing this one. Fast forward into may and the other guy apparently tried to drop his asking to $1.2m after inspections. Seller of course put everything back on the market. I jumped the day I heard of it and basically made the same $1.5m offer.

Through some silver tonguing, I made it under contract! Great! Check my bank account. I have about 80k of disposable income. I'll make this work. I have a closing date of 30 days. So within 2 weeks, I had to do some really complicated stuff using HMLs, my primary commercial banker, and a whole lot of private money. In all, I raised about 250k from private sources ranging from friends, family, and random people I found on facebook.

we close end of June and its off to the races. I basically gave myself another 45 days to get the places rehabbed, rented out, and ready for refinance. Most of the work was cosmetic...painting, new floors, etc. However some units required a gut rehab, new kitchens, appliances, HVAC, etc.

To summarize, I took the 15 units @ 10% occupied generating 950/unit to 100% occupied at an average of 1800/unit within 3 weeks. I finished all rehab Mid Aug. All in I was only about 115k in terms of remodeling/rehab/holding costs for all the units.

I worked myself to death doing this...hoping I'd get the killer cashout refinance I had accomplished previously in another deal

Called 20 + banks and only two would entertain me. Most said I was too young, too inexperienced, blah blah blah. Well I got an appraisal and it came in completely low. I disagreed with so many things appraiser said. He put me at $1.9m. Luckily one bank said they'd loan up to 82% of the ARV. another said they'd do 70% of the ARV. I risk another $3k in appraisal cost and $12k in holding costs for another appraisal?

I decided against that... and just took what I could get. I did however work out with the bank that after a year of performance, they will re-evaluate and potentially give me more cashout in the future.

So here's a rough number breakdown.

purchase $1,500,000
Loan Amount 1,300,000
Rehab+holding+closing costs $115,000

ARV 1,900,000
new Loan (20 year, 6.25, 5 year)- $1,560,000

Cashout portion- $260,000

Cashout- FFFF (friends, family, facebook friends)= 10,000

Money in deal = 45,000

Rental Side of Things (by month)

Current Income- 27,000/m (Proforma is 31,500 since I had to rush rent out)
Expenses- (Utilities, Taxes, 25% Vacancy/Management/CAPEX, insurance, etc)- 12,500/m
Debt- 11,400/m
NOI- 3100/m

Something like that at least

For the other questions that may pop up:

I self manage
I doubled my portfolio in one deal

I was my own GC for the project

I still have a full time job in securities trading

I worked 110 weeks for 2 months straight

I am burnt out

I hit a lot of roadblocks including getting sued, vandalized, robbed, and threatened

I had a lot of physical blackouts and emotional breakdowns
My outlook in general on people is definitely more negative

However I am also ready to move on

This post was very much to speak on an experience and tell a story. I am not opening myself up to be a mentor, give specifics, etc unless you want to paypal me first for my time ;)

I guess it could've been worst, but we never go into these deals believing the worst happens right?

Thank you for giving an insight into what these types of deals can entail. 

I see you self manage but still mention you deduct it from your expenses, seems like a smart way to go about it.

@David Zheng That’s a good story. You’re probably at the point where you can grow your portfolio slower? That’s what I’d probably recommend if I were you
Originally posted by @David Zheng :

@Caleb Heimsoth If Elon can do it, I can do it

While technically true he’s also been in the news for some not so great tbings lately, likely made worse by his bad sleeping habits... just something to think about.  

@David Zheng

Awesome job and thanks for sharing!

Is this your first MF deal of this size? Just a few notes:

  • Banks want around 12 months of stabilized rents to give a more favorable valuation.  Best to take your time, get good tenants and top rents to push valuation up.
  • I'm assuming you had some holding costs in the beginning but your holding costs would be low or nonexistent once you rented it out?  In other words, take your time in putting together a good property with good paying tenants to get the best valuation for refi or exit.
  • Most lenders can do 70% - 75% LTV max.
  • Expenses for MF typically range from 30$ to 40% of gross rents. This includes capex, repairs, taxes, insurance, etc.  It also includes property management but sounds like you are self managing.  After you get some experience, I highly recommend paying up and hiring a property manager.  Your time would be better spent finding deals and networking than chasing down clogged toilets.
  • Once you have a system in place with a good property manager, your time should be minimal to manage that property....1-2 hours a week.

I hear you that you're burned out...totally understand. Keep in mind, the 2nd time is much easier and the 3rd is easier than that and so on.  Cash in the bank is great but your network of lenders, prop managers, brokers, etc is worth so much more.

Again congrats!

@Paul Choi

This was my first deal of this size. My last deal I did in 2017. triplex I bought for 230k, put in 110k, 2 months later I cashout refid at an ARV of 680k . pulled out 220k in cash and its grossing 8200/m. figured I could do the same thing x 4. I worked with the wrong appraiser this time.

when your HML and private investors loans have 12% interest only payments, I bet you'll rethink about that 12 month seasoning period haha

most lenders do 70-75. not all. you can find higher LTVs if you try

trust me, I've had about a million people tell me to 3rd party my management however in my situation a lot of money would be thrown away doing that. Sure I can call up a plumber to fix a toilet or contractor to replace a garbage disposal. I'll get charged $150-$200 for the 20 minutes they took to take care of that not to mention the ridiculous 8-10% fee per month for taking a tenants call? Just in this deal, that's $2700/m.  I mean I can only analyze as many deals as the capital I for buying deals. Where I'm from the market is dry as hell. not interested in penny pinching ok deals. I have reasons I self-manage right now in my career. But you can bet before I'm 35 i'll be making my business calls from my beach house ;)

Good stuff @David Zheng congratulations. I often come on this website because I feel burnt out, and the people here are likeminded/supportive and help make the process a little less emotionally draining for me. I also get re-affirmed that I'm on the right path. But you made a commitment and followed through, despite all the negative s*** that came along with it. Should be proud of yourself

@David Zheng ,

I just wanted to say, I can't even imagine what it's like to be you!   I have a partner, and I just can't even imagine the amount of stress and headaches you have!  I mean wow, the size and complexity of your deals,... i'm impressed!!  Congrats on all your success!    

Also, thanks for pointing out the burn out factor... I definitely feel it too,  for the past 2.5 years, 90% of our weekends,  in addition to our full time jobs, are just us working on the houses...  it's kinda sad when you remember Memorial day.. yeah.. that we were working on the houses.. and then Labor day... working on another house and PS-- summer is over... lol that's the third summer this has happened!   it's nice to know others are out there workings their butts off and hustling like we are!    Congrats again!    

@David Zheng I think it’s a great testament to how motivated and inspired you are . Most people would have given up before they got started much less with all your roadblocks . I like how you pushed on and self manage . Most investors won’t do that and most give a huge chunk of profit away too! That was creative how you raised money . All in all it worked out and your on your way .just remember if it was easy everybody would do it , everyone would be rich . Reaping is reserved only for those that sow ! If you don’t sow you can’t reap .
Originally posted by @Caleb Heimsoth :
@David Zheng

That’s a good story. You’re probably at the point where you can grow your portfolio slower? That’s what I’d probably recommend if I were you

are you still driving your lambo ??? 

your investors you brought in are they in the deal or did you cash them out ?  the 3100 a month is that split.

do you take a management fee for doing all of this for the truly passive money investors.

Originally posted by @Jehoha Lewis:

How can a guy abusing drugs get so much support.   He is young so he can handle it.  But overtime drugs will win.

Sure he may make a few million but for what.   Premature passing.  This guy needs help.  And not with RE  His RE acumen seems spot on.

 give it a rest dude. your not funny and your kind of a full on pathetic jerk.

@David Zheng bro you’re a gangsta! You’re killing it, love the drive and ambition at such a young age. More success to you, don’t give up, you’ll make it far bro! Cheers!!!
@David Zheng Your story is a lot like mine over the last year. I am wondering what you are doing mentally to get over all the stresses associated with a large project?
@Jehoha Lewis You dont know what drugs he may have taken. For all you know he could have been high off b12. But I digress because the point is not that he took drugs but that he accomplished an amazing feat and DESERVES recognition and relaxation @David Zheng Can you share more on the bumps in the road? Was it bad tenants or something else? Also for newbies, can you explain how the deal was structured a bit more with your private money? I'm interested to know what FFFF got out of the deal when investing 10,000 into you if anything at all?