BRRR Cash Out $250k Case Study

36 Replies

I am closing on the re-finance on a multifamily in Ohio where we will cash out $250k and I wanted to share my case study with others so they can learn from our mistakes and successes. First, here are the quick numbers:

20 units - all 2 bedroom, 1.5 bath town house style units.

Purchased for $368k

Renovations: $175k

All in for $555k

New Appraisal: $1.1M 

Bank willing to loan 75% LTV = $825,000

Cash out on refi: $270k

So here's my case study: I have plenty of experience with single family/residential properties and creative deal structures but this was my very first commercial deal I'v purchased. I found the property through cold calling (my partner is a MF broker and has access to certain tools so could get the guys phone number when data basing). The seller happen to be in foreclosure and his property was distressed, 50% occupied, rents were way too low, and the property needed a lot of work done to it. He owed around $263k to the bank, but hadn't been paying the mortgage for a long time, so it was actually set to go to sheriff sale when we talked to him (we ended up closing 1 week prior to the sheriff sale). We ended up buying this property for $368k but bought the property subject to the existing mortgage. We brought about $105k cash to closing which went in the sellers pocket, and we kept the $263k mortgage in place and started making the mortgage payments. We raised an additional $150k from private lenders for the construction improvements. 

For the rehab and construction of the units, we used a combination of subs and GC to make the improvements to the property. I focused on the rehab and the contractors and hired a 3rd party professional property management company to focus on the marketing and lease up of the units and they did a killer job! We had weekly meetings with the property management team which helped keep everyone on the same page and allowed them to lease up the units as fast as we renovated them. 

We ended up renovating 12 out of 20 units and leasing them all up. The tenants we kept, we had sign new leases at increased rents. We bought the property in May and as of the October 1 rent roll we were 100% occupied and all 20 units have new/fresh leases signed at new/market rents. 

We talked to 10-12 local banks throughout the time we owned the property about what we wanted to do (re-fi after stabilizing) and continued to give them updates every month or two. Once we were 100% occupied the banks were willing to get serious, which we then narrowed down to 4-5 banks that were serious about us and our property. This part (talking with banks) was new for me and I wasn't sure how they would view a 'full time house flipper' when giving me a $1M dollar loan. It turns out, it was easier then I thought! We got pre-lim terms and concerns with 4-5 banks and paired that down to the 2 we liked the best and had them give us term sheets. We picked the bank with the best terms and fees (we were more concerned with terms then fees...we have a 10 year term with 25 year amortization, 4.5% interest rate, most the banks offered 5 year term and 25 year am, 4.75-5.5%). Like I said above, the re-fi process has been easy....2 years of personal tax returns, personal financial sheet, credit check, rent roll, and 2 year projections of the property. Note, I don't have w2 income and my 'job' has been flipping houses full time the last 4 years, so I didn't think banks would like to loan to me, but literally no issue (mostly because the property is such a good deal and well positioned). Bank is willing to give us 75% loan to value and no seasoning period. We provided the bank with the financials and where we think the value should be ($1M-$1.1M), and the final appraisal came in yesterday: $1,100,000. The bank is willing to loan us between $825,000. We are all in for $555k (with paying interest to our lenders), so we should put $270k+ in our pocket, if we choose to take all 75%. We might take 70% so we have a lower monthly mortgage payment and we cash flow higher, yet still can pay off our private lenders and put $215k in our pocket. 

This deal finished ahead of schedule and out performed our financial projections in terms of monthly rent amount and value, which we believe is partially due to our conservative underwriting but also in part to the current market conditions (gotta give credit where credit is due!) so we don't expect all our deals to be this good! 

In the end, lessons learned and advice I would give:

1. Go big. It's a lot easier then it seems. Once you rehab 1 unit, you have the scope of work to turn the next unit. Just add a couple commas and a couple zeros to your numbers. 

2. Interview tons of PM Companies and don't cheap out. The management company is almost more important than the actual property you buy. Good management can turn around a bad property and bad property management can ruin a good property. 

3. Talk with local and regional banks before you start your project and keep them updated throughout. Find the banks willing to build relationships and loan on 'smaller' commercial deals that big banks won't (because of loan size). Ask for their commercial loan requirements, they are similar but different at each bank. If they require borrower to have 10% skin in the game or a net worth equal to the loan amount and you don't meet either of those requirements, be transparent with the bank. They are OK with you bringing in a partner simply to meet the liquidity requirements. You will be surprised at what banks can do for you. 

4. Stay focused - these deals can go south, quickly, if you don't have a game plan and don't stay on top of executing it. But if you have a plan and follow it, you will be fine. 

I hope this short case study can help someone else or inspire them to take the next step in their business! I love flipping houses but after this commercial deal, I think I MIGHT love commercial MF properties more! Our goal is to purchase 200 units in 2018 with a minimum of 20 units per building (anything 20-200 units). 

Feel free to reach out with any questions or if you want to talk more about these types of deals. I'm here to help. 

Congrats on great execution and a home run deal. Thanks for sharing your experience!

@Brian Garrett Thanks for the feedback and no problem sharing my experience. I just want to help other people. Hope to find more of these deals but I realize this is a home run. I'll take double's all day! Do you purchase your MF in Florida or elsewhere in the country?

Originally posted by @Lonnie Freeman :

@Brian Garrett Thanks for the feedback and no problem sharing my experience. I just want to help other people. Hope to find more of these deals but I realize this is a home run. I'll take double's all day! Do you purchase your MF in Florida or elsewhere in the country?

I'm trying to find deals locally but the market is red hot and very competitive here.

I'm going to ramp up my efforts after the holidays and see what I can make happen.

I've also started discussions with other investors out-of-state about potential partnerships as well.

Awesome deal, very inspiring!

Thanks for sharing a great story, Lonnie! Did the bank have a specific CAP RATE or NOI requirement? I'm trying to determine what they view as a "good deal."

Thanks for sharing your story!  I haven't done a commercial deal, but most that I find offer owner financing.  I will research this more for future investments.

Originally posted by @Brian Garrett :
Originally posted by @Lonnie Freeman:

@Brian Garrett Thanks for the feedback and no problem sharing my experience. I just want to help other people. Hope to find more of these deals but I realize this is a home run. I'll take double's all day! Do you purchase your MF in Florida or elsewhere in the country?

I'm trying to find deals locally but the market is red hot and very competitive here.

I'm going to ramp up my efforts after the holidays and see what I can make happen.

I've also started discussions with other investors out-of-state about potential partnerships as well.

 Same here! I'm in Columbus but Central Ohio is so hot and competitive, so I've been looking at markets in Ohio but just outside of Columbus. How are you finding your deals?

Originally posted by @Richie Pace :

Awesome deal, very inspiring!

 Thanks Richie! You can do it too!

Thanks again for sharing Lonnie. Love to see how everyone's process on finding and financing deals can be very different. Was this property in our local Columbus market or another part of Ohio?

@Lonnie Freeman thanks for your post and congratulations on the success of the deal. this is truly a inspiring story and I desire to one day do the same with multi family. 

This has given me some great tips and some action steps to take during the process so a huge thanks for taking the time to post this!!! 

Thanks for sharing the details. This is a great deal. Congrats!

@Lonnie Freeman

Congratulations on a great deal. In particular, I liked your comment on how you were focused on terms and not fees. That was the icing on the cake.  

You thought long-term and were humble in crediting the market timing as working in your favor apart from sweat equity. Great read and looking forward to reading more about your successes.

Originally posted by @Rob Beeler :

Thanks for sharing a great story, Lonnie! Did the bank have a specific CAP RATE or NOI requirement? I'm trying to determine what they view as a "good deal."

Hey Rob, that's a good question. The bank didn't have a specific cap rate or NOI requirement, their biggest requirements are usually LTV, DCR (debt coverage ratio 1.25x+), track record and liquidity. But the cap rate and NOI is determined by the appraisal and the financials (income / expenses). The cap rate can be radically different from 1 building/market to another, so you need to find the "market cap rate" for your building in that area and run your numbers on that. Regarding NOI, you will need to run your own financial model and provide that to the bank. Your income and expenses need to be realistic and match market rates (banks won't accept removing the management fee because your 'managing it yourself, so there's no expense'). The banks will put the market numbers and appraisal numbers into their own investment models, but you should provide them to show you know what your doing and give them a guide as to what you think you can achieve. Just make sure you match your market (rent levels, expenses, NOI, cap rate).

To answer your question about what a 'good deal' looks like: High DCR, high occupancy, market rents, operating at a higher cap rate then market, having 25%+ equity.

Hope this helps!

Originally posted by @Aron D. :

Thanks for sharing your story!  I haven't done a commercial deal, but most that I find offer owner financing.  I will research this more for future investments.

 Hey Aron, no problem, hope it helped someone! You're correct, there is a lot of owner financing opportunties in commercial deals. I've noticed in2016- 2017 there was less of that in my market because it's an extremely hot and competitive market and there are multiple offers on all great MF properties, and the buyers are strong enough that they don't need seller carry-backs, which is obviously more attractive to sellers. That being said, on smaller deals (4-20 unit / $200k-$1M) you are usually under the threshold of the 'real' commercial buyers, so I find that market to be less competitive, and you have good opportunities for seller financing (like my deal I shared on this post). 

Originally posted by @Hashim Dean-el :

Thanks again for sharing Lonnie. Love to see how everyone's process on finding and financing deals can be very different. Was this property in our local Columbus market or another part of Ohio?

 Hey Hashim, your welcome - glad to share! Great question! This property was NOT located in Columbus, but very close. It's located in a small town called London, Ohio that is a 35-40 minute drive from downtown Columbus. Since Columbus is such a competitive market and there are eyeballs from all over the country looking/buying here, part of our strategy is buying in steady tertiary markets around greater Columbus. 

Originally posted by @Mark Webb :

@Lonnie Freeman thanks for your post and congratulations on the success of the deal. this is truly a inspiring story and I desire to one day do the same with multi family. 

This has given me some great tips and some action steps to take during the process so a huge thanks for taking the time to post this!!! 

 Mark, thank you, I appreciate it! Glad I could inspire you and hope you success on your MF path! Let me know how I can help! I'll try to share more posts/case studies this year. 

Originally posted by @Omar Khan :

@Lonnie Freeman

Congratulations on a great deal. In particular, I liked your comment on how you were focused on terms and not fees. That was the icing on the cake.  

You thought long-term and were humble in crediting the market timing as working in your favor apart from sweat equity. Great read and looking forward to reading more about your successes.

 Omar, Thank you! Terms are important. I'm glad you caught that. I was more concerned with the 5 year term vs 10 year term. In my opinion, we are due for some sort of shift in the MF market sometime in the next 5 years, even if it's a slight shift. I don't know what the market will look like in 5 years from now and that cautioned me a bit. I liked the idea of having the loan locked in for 10 years and having the option to refinance on my terms, anytime in those 10 years (no pre pay after year 3). Thank you for the kind words - I appreciate it. I hope I have continued success too (lol) and share it so it can help someone else! 

@Lonnie Freeman great success story, keep up the good work!

Two important lessons stood out from your deal. One you mentioned, which is talk to a lot of smaller local banks. They are usually the ones who will give the best terms to newer investors.

The other point that jumped out at me, was your strategy of paying the distressed seller CASH (I'm sure that helped close quicker) and keeping the original mortgage. Sometimes the hardest part of closing on a deal (especially when it's time sensitive) is the banks, trying to close on a mortgage. Brilliant strategy!

Congratulations @Lonnie Freeman Really seems like you hit a home run there. A few questions.

Are you planning to keep the property for a while or are planning to eventually sell it in a few years.

Also, If there is one thing you believe you could have done to drive more value from this, what would it be?

Originally posted by @Lonnie Freeman :

I am closing on the re-finance on a multifamily in Ohio where we will cash out $250k and I wanted to share my case study with others so they can learn from our mistakes and successes. First, here are the quick numbers:

20 units - all 2 bedroom, 1.5 bath town house style units.

Purchased for $368k

Renovations: $175k

All in for $555k

New Appraisal: $1.1M 

Bank willing to loan 75% LTV = $825,000

Cash out on refi: $270k

So here's my case study: I have plenty of experience with single family/residential properties and creative deal structures but this was my very first commercial deal I'v purchased. I found the property through cold calling (my partner is a MF broker and has access to certain tools so could get the guys phone number when data basing). The seller happen to be in foreclosure and his property was distressed, 50% occupied, rents were way too low, and the property needed a lot of work done to it. He owed around $263k to the bank, but hadn't been paying the mortgage for a long time, so it was actually set to go to sheriff sale when we talked to him (we ended up closing 1 week prior to the sheriff sale). We ended up buying this property for $368k but bought the property subject to the existing mortgage. We brought about $105k cash to closing which went in the sellers pocket, and we kept the $263k mortgage in place and started making the mortgage payments. We raised an additional $150k from private lenders for the construction improvements. 

For the rehab and construction of the units, we used a combination of subs and GC to make the improvements to the property. I focused on the rehab and the contractors and hired a 3rd party professional property management company to focus on the marketing and lease up of the units and they did a killer job! We had weekly meetings with the property management team which helped keep everyone on the same page and allowed them to lease up the units as fast as we renovated them. 

We ended up renovating 12 out of 20 units and leasing them all up. The tenants we kept, we had sign new leases at increased rents. We bought the property in May and as of the October 1 rent roll we were 100% occupied and all 20 units have new/fresh leases signed at new/market rents. 

We talked to 10-12 local banks throughout the time we owned the property about what we wanted to do (re-fi after stabilizing) and continued to give them updates every month or two. Once we were 100% occupied the banks were willing to get serious, which we then narrowed down to 4-5 banks that were serious about us and our property. This part (talking with banks) was new for me and I wasn't sure how they would view a 'full time house flipper' when giving me a $1M dollar loan. It turns out, it was easier then I thought! We got pre-lim terms and concerns with 4-5 banks and paired that down to the 2 we liked the best and had them give us term sheets. We picked the bank with the best terms and fees (we were more concerned with terms then fees...we have a 10 year term with 25 year amortization, 4.5% interest rate, most the banks offered 5 year term and 25 year am, 4.75-5.5%). Like I said above, the re-fi process has been easy....2 years of personal tax returns, personal financial sheet, credit check, rent roll, and 2 year projections of the property. Note, I don't have w2 income and my 'job' has been flipping houses full time the last 4 years, so I didn't think banks would like to loan to me, but literally no issue (mostly because the property is such a good deal and well positioned). Bank is willing to give us 75% loan to value and no seasoning period. We provided the bank with the financials and where we think the value should be ($1M-$1.1M), and the final appraisal came in yesterday: $1,100,000. The bank is willing to loan us between $825,000. We are all in for $555k (with paying interest to our lenders), so we should put $270k+ in our pocket, if we choose to take all 75%. We might take 70% so we have a lower monthly mortgage payment and we cash flow higher, yet still can pay off our private lenders and put $215k in our pocket. 

This deal finished ahead of schedule and out performed our financial projections in terms of monthly rent amount and value, which we believe is partially due to our conservative underwriting but also in part to the current market conditions (gotta give credit where credit is due!) so we don't expect all our deals to be this good! 

In the end, lessons learned and advice I would give:

1. Go big. It's a lot easier then it seems. Once you rehab 1 unit, you have the scope of work to turn the next unit. Just add a couple commas and a couple zeros to your numbers. 

2. Interview tons of PM Companies and don't cheap out. The management company is almost more important than the actual property you buy. Good management can turn around a bad property and bad property management can ruin a good property. 

3. Talk with local and regional banks before you start your project and keep them updated throughout. Find the banks willing to build relationships and loan on 'smaller' commercial deals that big banks won't (because of loan size). Ask for their commercial loan requirements, they are similar but different at each bank. If they require borrower to have 10% skin in the game or a net worth equal to the loan amount and you don't meet either of those requirements, be transparent with the bank. They are OK with you bringing in a partner simply to meet the liquidity requirements. You will be surprised at what banks can do for you. 

4. Stay focused - these deals can go south, quickly, if you don't have a game plan and don't stay on top of executing it. But if you have a plan and follow it, you will be fine. 

I hope this short case study can help someone else or inspire them to take the next step in their business! I love flipping houses but after this commercial deal, I think I MIGHT love commercial MF properties more! Our goal is to purchase 200 units in 2018 with a minimum of 20 units per building (anything 20-200 units). 

Feel free to reach out with any questions or if you want to talk more about these types of deals. I'm here to help. 

I'm very interested in the cold-calling process. I'm looking at doing a 8-12 unit MF in a certain area, but the market is very tight. I'd like to do some cold calls. Any suggestions on how to get started? I'd like to do higher volume vs googling apartments and looking up tax records.

Hey Lonnie, congrats on the amazing return. Would you mind sharing the rents and size of the units, HOA fees?

Thanks, Ed.

Originally posted by @Yonah Weiss :

@Lonnie Freeman great success story, keep up the good work!

Two important lessons stood out from your deal. One you mentioned, which is talk to a lot of smaller local banks. They are usually the ones who will give the best terms to newer investors.

The other point that jumped out at me, was your strategy of paying the distressed seller CASH (I'm sure that helped close quicker) and keeping the original mortgage. Sometimes the hardest part of closing on a deal (especially when it's time sensitive) is the banks, trying to close on a mortgage. Brilliant strategy!

 Yonah, thanks for the comments - I appreciate it! We'll keep up the hard work!

You caught on to great points. In terms of the acquisition strategy: This was a great deal regardless of how we structured it, but the seller was so motivated, he told me "I don't care of Santa Clause buys it, as long as I don't get foreclosed on, and if I can walk away with cash that would be great"....That's when I decided to get creative. I typically would have purchased this property with all cash investors/private lenders and I pay my private lenders a much higher interest rate then what his current mortgage interest rate was, so by keeping the existing mortgage in place I was able to save a lot of money on interest. Another benefit was I didn't have to raise as much money from private lenders. It also helped the seller out too....His credit just got better this week when we refinanced and paid off his mortgage. Instead of the bank reporting to the credit bureau's his mortgage as a foreclosure or a charge off, it will show 'paid in full'. Win-win for everyone!

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