How I Made Over $1 Million on 1 Deal -after 6 years of headaches!
I am hesitant to write this post because I don't want to brag about my successes (it's really a team effort). Besides, the kind of money I've made on this deal is just the sum total of headaches and aggravation and time, a LOT of work (and a little bit of luck)...
But I've decided to share this story and what I've learned after the post of Henri Meli entitled "How I added over $750,000 in value in 18 months of ownership". The many things BPers have learned from it (I learned some new things too) based on the many positive comments he got inspired me to share my story too.
Now, just a warning: newbies, do NOT try this at home. If you're a newbie investor and have not bought your first deal yet, do NOT buy as your first deal the property below. I was already experienced when I acquired this and I have a team of experts already. Without my prior experience and without my team, this deal would have bankrupted me instead!
So here we go:
Acquisition - How We Bought a 48-Unit Building for No Money Down (Feb 25, 2011)
Through my network of real estate agents I found this 48-unit brick building. It has 36 one-bedroom units and 12 two-bedrooms. Only 8 out of 48 units are occupied and surprisingly, only 4 units need to be completely gutted out (the rest needs cosmetic rehabs). The roof needs to be replaced.
This property is not in a good area of Cincinnati. People here on BP will classify the area as a "D" area. But I've decided to buy the property because I believed I have the vision, the plan and the team to turn this property around. I contacted one of my private investors and showed her the numbers:
Acquisition Price - $220,000
Renovation - $190,000
Closing/other costs - $13,400 (this includes a little bit of reserves too)
Total "All In" Costs - $403,400
If I can increase the NOI to $10,000/month or $120,000/yr, at 10% cap rate, the property will be worth $1.2Million.
She lent me $385,000 at 11% and 2 points with a first mortgage position on the property. I have another investor who lent me $18,400 at 8.5% (both are interest only loans) and he gladly took 2nd position.
I bought the deal No Money Down through OPM (Other People's Money) and my lenders gladly lent me the money because they can see the building has almost an $800K upside.
Solving THE Problem - How We Increased Occupancy from 16% to 100%
This is the MAIN problem - only 8 units are occupied, partly because the building is not being managed very well and mainly because it's in a bad area. So my plan is to get the building rented, not by "normal renters" but by the "government". Even before I found this deal, I already did a lot of legwork. I spoke with city councilors, I spoke with different government agencies both state and federal about housing programs for the elderly, for veterans, the homeless and for various special needs groups. Luckily, when we closed on this property, I found a government agency with the right program that agreed to lease the property - the entire property!
We immediately went to work and rehabbed the properties. In just 60 days we went from 16% occupancy to 100% occupancy as this government agency brought in 48 tenants and they paid for their first month's rent and security deposit. What's more the government agency provides GUARANTEED rent at least for the next 12 months!
The Headaches - Kitchen Cabinets, Plumbing Problems, Etc.
But not all is well. One headache pop up one after another. One tenant complained about water leaking. Then another tenant complained of the same thing. When we did the initial renovation, we did not replace the kitchen cabinets because we were trying to save on cost. Later on, we found out that the water leaks are coming from old piping behind the kitchen cabinets!
To add insult to injury, some of the furnaces stopped working during the winter! So now we had to replace some of them. Oh, and the property taxbill was also about to come due.
All of these unexpected expenses resulted in our bank account for the property running dangerously low. I couldn't sleep.
I hustled. I negotiated with some contractors that their payment is going to be delayed slightly. The deal is profitable on paper but we're becoming short on cash. I even had to pay some late penalties on some bills but I had to do what I had to do to keep above water!
And the headaches did not stop. More kitchens in more of the units need to be replaced. And over several summers, we had to replace the AC units too! There were months the property expenses came out of my pocket but luckily, when the rents came in on subsequent months, I got paid back. Otherwise, my wife won't be happy with this deal.
Headaches, after headaches came in. Good thing we have a full time maintenance guy on this property being overseen by my partner Nate. I am already bald so I can't pull out more hair!
Eventually, my accountant told me that our team was able to turn around the property. My property manager did an awesome job lowering the expenses down to the bare bones. Our leasing manager also replaced some of the tenants as the government agency we worked with before did not guarantee the lease for all the units over the next couple of years. We got some section 8 tenants and even market tenants now. The lease is not 100% guaranteed with all the units but we kept the occupancy to 100% most of the time.
Over the next several years, our Net Operating Income increased to $11,000/month, exceeding my projection by 10%!
Profitable Exit - We Sold It for $1.695 Million! (October 30, 2017)
All during this time, the area was becoming better and better too. More and more capital is flowing in multi-family apartments in the Cincinnati area. I told my partner Nate that it's time to sell. The average cap rates is now 9.5%.
We've decided to be bold and ask for 8.5% cap. Other property owners thought we are nuts. But why shouldn't we? The building is 95-100% occupied, with no deferred maintenance and operating at a very high efficiency. It's a turnkey building and deserves a premium. We got one of the best selling agent in the business to find us a buyer. We went through several prospective buyers of course and there were a couple of times I thought we would close but didn't. I was adamant about getting a high price for this building and good thing I was patient because we eventually found an eager buyer who was very excited about the deal.
To get the price we wanted for the deal, we offered a generous buyer's credit. After going back and forth, we settled on a $165,000 credit in exchange for the price of $1,695,000 (with an after buyers credit cap rate of 8.6%). After all the closing costs, we netted around $1.5 Million.
We closed the deal October 30, 2017.
After 6 years of headaches and a lot of sleepless nights - it was finally over with 7 figures in our bank account!
The Many Mistakes I've Made
If I write down all the mistakes I've made on this deal, I will have to write another post. But here are just two of them:
- I was trying to be cheap with the rehab - and paid more money in the end
- I didn't have enough money in our reserve account - and lost my hair (in addition to many arguments with my wife!)
Had I replaced the kitchen cabinets early on and didn't try to be cheap, we would have found the bad plumbing early on. We won't have the water damage in some of the units and we could have avoided a lot of the costs.
Moreover, I didn't factor in enough money for reserves. So we're always short of cash with this project. I should have done a better job budgetting for expenses instead of me shelling out cash in some months. My wife could have been happier if I did a better job. And probably, I will still have some hair too.
What I Learned on This Deal
1. Creativity and Hard Work
You need creativity to come up with a turn around plan and then work your a@$ off to implement the plan. Anyone can succeed in real estate if you have these two things. I used out of the box thinking to get the building 100% leased. I knew because of the area, getting market tenants was not going to work. So I hustled and work HARD. I spoke with a lot of people. I failed again and again. But I persisted. And eventually, I succeded!
2. Real Estate Investing (specially Multi Family) is a TEAM Sport
I am blessed with a good partner Nate who is a heck of a lot better than me at construction and managing rehabs and contractors. I am lucky to have a great property manager, leasing agents and maintenance managers. And my team of real estate agents - I would never found this deal, and would never have gotten top price for it without them. I just shake my head when I hear some real estate investors complain that real estate agents are not good to work with. My real estate agents are worth their weight in gold!
And don't forget your lenders and investors. I found my favorite lender just through networking. She was referred to me and we did one good deal after another. I communicated with her constantly even during the bad times and good thing she was patient with her money.
3. The Numbers, The Numbers, The Numbers
The "Path to Profit" was clear with this property. There was no speculation involved. I knew how to increase rents and how to decrease expenses. Even if the cap rates did not change, we would still sell the property at a good price. BP is such a good platform for teaching newbie investors to always look at the Numbers on a property before you buy. Be conservative with your projections. Factor in more money in reserves, specially in a turnaround project. Don't be penny wise and pound foolish and do the rehab right the first time. You will save money in the end.
So there you have it.
How I earned a million dollars on one deal after 6 years of headaches.
Hope you guys learned from my experience and not make the same mistakes I made.