How to Buy a $5.6 Million Dollar 62 Unit Apartment With No Money

36 Replies

I want to hear the story of some of your creative real estate purchases and I'll share one of my own.  I hope it inspires newbies to get creative and not be held back by the cash on hand in their bank account.

1) Found a $6 mil 62 unit apartment complex that I negotiated down to 5.6 mil.

2) The earnest money deposit PLUS the due diligence was $156,000.  Instead of using cash on hand, I use a combination of 0% interest business credit cards, equity lines of credit, and other General Partners to help me put the deal together.

3) The total investor capital I had to come up with was roughly 1.5 million.  This part WAS a little stressful, because if I didn't come up with this capital within 20 days, I would have $25,000 go HARD.  I was $400,000 short at the 20 day mark, but made a decision to press on and risk the $25,000.

4) To get investors, I structured the deal favorable to the investors- 75/25 split between the investors and myself with a 6% preferred return (the investors get 6% cash on cash return on their money BEFORE the rest of the cashflow is split 75/25).

5) I ended up with 13 investors that came in anywhere from $50,000 to $350,000

6) Monkey wrench came in 10 days before closing- they wanted me to show $450,000 liquid.  Most of my money is in non liquid assets, so I didn't have it.  Spoke with an investor and agreed to give him a 1% transaction fee to move $450,000 into my account for a week.  Moved the money into my account, gave it to the lender, and passed that stage, then moved it back into the investors account and paid him interest.

7) Another monkey wrench came in 2 days before closing when they gave us the HUD settlement statement and told us the green fee would be $60,000 instead of the $5000 they originally told us. Additionally, they were requiring that our insurance be paid 14 months UP FRONT, which again, was not part of the initial underwriting. So I had to give up my acquisition fee, dilute investor equity by gaining additional funds, or find a another creative solution. We opted to offer an investor the opportunity to give us a personal loan for the additional funds, paid back at 10% over 2 years. We would pay this with a combination of what we WOULD be paying per month for insurance, and from our Asset Management Fee. It wasn't ideal, but it still left plenty of meat on the bone.

8) CLOSED- With the $56k Acquisition fee I paid off the credit lines, and BOOM: now own a $5.6 million 62 unit.  

Moral of the story- Money is never the problem.  Creativity and Resourcefulness are ALWAYS the problem to accomplish your goals.  Good news is, those are easy to solve.  Is it easy? no.  But it's not hard either. 

What have been your CREATIVE Real Estate Purchases? 

@Jesse Myrick Thanks!  I've got a lot of content out there about it.  But basically, getting investors comes down to 3 things:  1) The know you, 2) They like you, 3) They trust you.

They have to know you, like you, and trust you to invest thousands of dollars in your deal, but it doesn't stop there.  They need to know you, like you, and trust you IN THE DEAL.  So if you can nail that down, you're golden!

@Ryan Enk cool story I'm into fix and flip at the moment. Looking into large multi family. This scenario is inspirational. Question could you brrrr out if you wanted to?

@Trent Chance until he doesn’t and his bank forecloses. I never understood why this type of investing is so sought after. What happened to building a portfolio the old fashioned way? Use your own money, do it over time and with moderate leverage. Deals like this will sink fast when a recession hits.

@Caleb Heimsoth I have little experience and you may be right but I've achieved everything I've achieved in life in abnormal and seemingly unlikely ways.

My gut response is that when recession hits he'll just have more people needing a place to rent.

@Shawn Rasmussen The great thing abut apartments that have over $1,000,000 in a loan value is that you can get these fannie mae government loans that are non recourse, meaning you do not need to guarantee the loan.  You can also get some outstanding terms, like 4% interest only for 5 years, which is what we got open this property.  The downside is that there is some red tape and some moving lines of pricing.  The GREEN FEE is one of them.  In order to get the loan you have to make "green" improvements, like electrical efficiency lighting, app controlled thermostats, insulation, and all kinds of other energy  or earth saving features.  When we were originally quoted it was $5k.  After they inspected the property so close to the closing they moved that number up to 60k.  What we learned from that experience was to raise about $150k more capital than what was needed.  That way, if we don't use it, we can return the capital to the investors faster, and everyone is happier.

@Caleb Heimsoth We have reserves built in to the project, both for maintenance, capex, insurance deductible, and emergency.  But of course, we did not want to tap into those reserves to get to the closing, hence the extra capital raise.

Hey @Dante Foreman thanks! Yes, you can definitely do the BRRR. In the apartment world, its called the VALUE PLAY MODEL. Basically, you buy an apartment that is like a Class C or B and needs some sort of value. Then you increase the rents and refinance with the bank and pay all the investors back. So on our 62 unit for example, we bought it at about a 6 cap. After making some value improvements to the property, we intend to bring the rents up about $150 per unit. That will increase the NOI buy ($150 x 62 units x 12 months) = $111,600. $111,600 at a 6 cap is a $1,860,000 increase in value to the property. Once we do that we will refinance and pay our investors back the majority of their capital, while they still have the equity in the project and enjoy the rental cashflows.

did you also have to have someone with a net worth of the amount of the loan on the loan  with no PG  or something like that

what do they call that person..  you rent their net worth for the project ??

Hey @Jay Hinrichs every lending agency is different for their requirements, but with the "agency" debt, meaning Fannie Mae, we didn't have to PG it.  I don't remember them having net worth requirements for this deal, although they could have had them, and I did submit my net worth statement.  I just don't remember them or what they were. I will tell you though, that if my net worth didn't meet their requirements, I would have invited an investor into an equity percentage of the General Partnership to get it done.  I've done $1 of equity for every $4 to $6 dollars guaranteed of equity in past deals

Originally posted by @Ryan Enk :

Hey @Jay Hinrichs every lending agency is different for their requirements, but with the "agency" debt, meaning Fannie Mae, we didn't have to PG it.  I don't remember them having net worth requirements for this deal, although they could have had them, and I did submit my net worth statement.  I just don't remember them or what they were. I will tell you though, that if my net worth didn't meet their requirements, I would have invited an investor into an equity percentage of the General Partnership to get it done.  I've done $1 of equity for every $4 to $6 dollars guaranteed of equity in past deals

Ya I just remember reading that on some of these loans one of the principles must have a verifiable net worth equal to the loan amount and that these types of folks  Angels  will rent out their net worth's since the debt is non recourse.. just cant remember what they call that Angel.

Anyway.. good job putting this together.  you must have a pretty good network already to raise 1.5 million fairly fast.. its not easy.. but once you get track record it gets MUCH easier..  

 

Very cool, did you have a track record to prove to your investors you knew what you were doing? I'm guessing your investors are all people you networked with previously?

Also how did you find the deal? Thanks for sharing!