How to Scale up Your Real Estate Portfolio

14 Replies

People have asked me how I was able to own 1,000 apartment units. It seems impossible and too good to be true.

But it's really NO BIG deal. I've been doing this since 1999. Other investors who figured this out actually have more units than me and did it at a shorter time.

So what's the ANSWER as to how one can scale up one's portfolio...it is to buy VALUE-ADD DEALS. Buying apartments that you can increase the value in a short span of time is the key to buying & owning thousands of apartment units. 

Once you increase the value, you can either:

1) sell and buy more buildings or 2) do a cash out refinance, pull the money out and buy more buildings

In both cases, you are able to buy more buildings. You can further accelerate it by using OPM - Other People's Money through syndicating apartment deals. BUT before you raise OPM, use your own capital first, prove the model to yourself first before risking another person's cash. 

Anyway, back to the topic...

What is a value-add deal? 

My favorite value-add deal is when the rents are low because the landlord/owner has not kept up with maintaining the property and kept the rents low to keep the tenants from moving to nicer apartments.

Here's an example of a value-add deal. We bought the building for $514,000. It needed about $10,000/unit in work and the rents were way market. There were 24, 1-bedroom units and 12, 2-bedroom units but the rent averages out to only $412/month per unit.

In 3 years we were able to increase the rents to an average of $805/month per unit (and we actually spent less than $10K/unit in improvements). I will write a more detailed breakdown in a separate post but below is the screenshot of the numbers:

In fact, the above spreadsheet jive with the appraisal we got for the property - it appraised for $2.1M. 

So that's it. Doing value-add deals is the key to buying and owning thousands of apartment units.

(Now a word of caution: as in any strategy, you have to know what you're doing and there are risks and pitfalls. But that's too much for me to cover in 1 forum post.)

Thank you for this informative post. I have tried several banks to do a cash out refi and am running into obstacles as my properties are in LLCs and the banks are looking for a full income to debt ratio check on me personally. Since I have mortgages on all my properties I seem to be overextended. Are there any banks that look at the equity as the main criteria? 

Originally posted by @Margaret Buoncora :

Thank you for this informative post. I have tried several banks to do a cash out refi and am running into obstacles as my properties are in LLCs and the banks are looking for a full income to debt ratio check on me personally. Since I have mortgages on all my properties I seem to be overextended. Are there any banks that look at the equity as the main criteria? 

The bigger apartment deals (5+ units) are evaluated and underwritten by the lender more on the equity of the deal, & the income of the apartments more than your personal income (they fall under commercial mortgages). They will also like it that you or your LLC have equity in your properties. Your personal credit still plays a factor though and since it's on case-to-case basis, you need to talk with several commercial lenders to see how your debt to income situation comes into play.

Again, the above is the case with bigger apartments but not with houses or 2-4 units since those fall under residential mortgages.

Originally posted by @Nathan G. :

Nice post, @Michael Ealy. It's a long-term game and you're proving that. Thanks for sharing!

 You're very welcome Nathan. 

I find your posts to be very informative as well and they show that you know your stuff.

@Michael Ealy, this obviously is a great way to scale using value add, but the tricky part for me is how to establish the costs for improvements?

I was wondering if you could comment on how you determine rehab costs and cost per unit?

Is it second nature by now for you, do you walk thru with a trusted contractor, or do you have a partner who helps determine costs?

My concerns are two fold.

1-inaccurate assessment of cost of improvements therefore going over budget.

2- getting taken by contractor or GC with change orders etc.

If I were able to overcome these two limiting beliefs/fears I just might be dangerous;)

Thanks in advance for your comments.

Ashley

Originally posted by @Ashley Pimsner :

@Michael Ealy, this obviously is a great way to scale using value add, but the tricky part for me is how to establish the costs for improvements?

I was wondering if you could comment on how you determine rehab costs and cost per unit?

Is it second nature by now for you, do you walk thru with a trusted contractor, or do you have a partner who helps determine costs?

My concerns are two fold.

1-inaccurate assessment of cost of improvements therefore going over budget.

2- getting taken by contractor or GC with change orders etc.

If I were able to overcome these two limiting beliefs/fears I just might be dangerous;)

Thanks in advance for your comments.

Ashley

Ashley,

Yes - since I've been doing this awhile...we are our own contractor as we GC our own project.

Being vertically integrated - meaning we have our in-house construction and renovation company (in addition to having our own PM company) has been such a big competitive advantage. I am blessed with having a great partner - Nate - who is THE expert in all things construction/renovation. Because of vertical integration, we are able to renovate projects significantly cheaper than other apartment syndicators (we're talking about 30-60% cheaper!).

One thing you can do in your market is seek out other investors who are good rehabbers. You can JV with them first to vet them out and see how they perform and see if you like them or not. If he/she delivers a great project with you (JV not contractor-client relationship but co-owners of a deal: he/she brings the renovation expertise/experience and you bring in the deal and PM and both bring money on the table) and you like the relationship, you can do a couple more deals and then partner up long term.

 

This is great @Michael Ealy ! These are the invaluable posts I feel like this board is useful for. Props to you and building such and incredible pool of income producing units. I have one question for you.

My only experience is with SFHs. The concept of improvement and leverage makes sense to me because it is similar with SFHs but I'm interested to know how you took the first step into apartment buildings. Has this process been filled with trial and error for you or did the first apartment complex you bought work out this way? Were you already a property manager for such properties or something similar? Did you start out buying these in better upkeep and then slowly transition new investments to more needy apartments where you knew by experience you could turn them into a more valuable asset? Just wondering because it seems like an experience leap that could be filled with pitfalls for a person who was jumping into your suggested process as a first timer or at least a first time apartment building owner.

Thanks for sharing your experience!

Dan

@Michael Ealy,

The JV recommendation makes perfect sense and keeps both parties interests aligned.

I appreciate the feedback and will start pouring thru my network to see who might be a good fit on the rehab side.

You make this seem easy so you obviously have put in your 10,000 hours.

Much appreciated!

Originally posted by @Daniel Ditto :

This is great @Michael Ealy! These are the invaluable posts I feel like this board is useful for. Props to you and building such and incredible pool of income producing units. I have one question for you.

My only experience is with SFHs. The concept of improvement and leverage makes sense to me because it is similar with SFHs but I'm interested to know how you took the first step into apartment buildings. Has this process been filled with trial and error for you or did the first apartment complex you bought work out this way? Were you already a property manager for such properties or something similar? Did you start out buying these in better upkeep and then slowly transition new investments to more needy apartments where you knew by experience you could turn them into a more valuable asset? Just wondering because it seems like an experience leap that could be filled with pitfalls for a person who was jumping into your suggested process as a first timer or at least a first time apartment building owner.

Thanks for sharing your experience!

Dan

 Dan,

I actually started my investing career with a duplex. I rented one of the units, and even had a roommate in the other unit I lived in and I lived rent-free. They call it "house-hacking" now.

When I lost everything back in 2002-2003 and have to re-start my investing career, I became a licensed real estate agent, learned property management and I managed the rehabs of smaller properties for people who know and trust me. It was a long ardous process.

Here's part 1 of a 3-part series:

https://www.biggerpockets.com/forums/55/topics/690349-from-bankruptcy-to-1-000-units-part-1-thru-the-dark-tunnel

However, when I transitioned to hotels, I found out the better route to scale up is to joint venture with the right partner.

So, for you...you have 2 choices:

1) You can do everything yourself - if this is the route you choose, start with a 4-family where 1 unit needs work and the three units are occupied but their leases are about to expire (maybe in 3-6 months). By doing this, you'll cashflow on day 1, and combined with the fact that it is a smaller property, you minimize your risk.

OR

2) Find an experienced apartment investor in your area and figure out how you can add value to him or her. Maybe look for deals or GC the renovation for free in exchange for equity in the deal or help him/her raise capital for apartment deals. By doing this, you can transition to apartments with lower risk given that you are leveraging on someone else's experience and expertise.

Makes sense?

Good stuff mike! one of the things I see with successful investors I know (and I’ve experienced this myself ) is DONT try to go at this alone !! The truth is Lone wolves starve in the wild . I get it ,We all want to keep the profits to ourselves and be the boss but oddly enough ,there is safety in numbers .you can actually move much quicker buy more and with less risk if you partner up with the right person . No one can know everything or be everywhere and Having another person involved can double your efficiency. It makes use of the mastermind principle where two people working in harmony with the same focused purpose can in effect create a third person . Sounds like psycho babble but it works .

@Michael Ealy Really great discussion with very practical tips.

We talk about numbers and profits on current deals, all that is great. But there is another very important number. The number of years you have given to building the networks and learning the in's and out of this business. Also its not just the numbers of years. Its the passion the drive and what else ( did you / can you give up) to be successful at this business. I know I am saying this to myself a lot these days -- Patience is a virtue.

I have a Corp IT job, there are days when laptop screen is the last thing I want to see after 10-12 hrs of meetings and discussions at work. But still that urge to get better, to have a bigger portfolio gets me back to the computer. BP has been a great resource, I keenly reviewed the Michale's land contract deal which generated $640 k profit. This and many other such threads work as goal posts for me. They have inspired me to get to 10 doors (mostly SF) and enabled me to get my first 2 unit duplex last year. Its hard but then I will not trade that experience of going thru it for anything :) 

Thanks Please keep sharing your insights.

Originally posted by @Michael Ealy :

People have asked me how I was able to own 1,000 apartment units. It seems impossible and too good to be true.

But it's really NO BIG deal. I've been doing this since 1999. Other investors who figured this out actually have more units than me and did it at a shorter time.

So what's the ANSWER as to how one can scale up one's portfolio...it is to buy VALUE-ADD DEALS. Buying apartments that you can increase the value in a short span of time is the key to buying & owning thousands of apartment units. 

Once you increase the value, you can either:

1) sell and buy more buildings or 2) do a cash out refinance, pull the money out and buy more buildings

In both cases, you are able to buy more buildings. You can further accelerate it by using OPM - Other People's Money through syndicating apartment deals. BUT before you raise OPM, use your own capital first, prove the model to yourself first before risking another person's cash. 

Anyway, back to the topic...

What is a value-add deal? 

My favorite value-add deal is when the rents are low because the landlord/owner has not kept up with maintaining the property and kept the rents low to keep the tenants from moving to nicer apartments.

Here's an example of a value-add deal. We bought the building for $514,000. It needed about $10,000/unit in work and the rents were way market. There were 24, 1-bedroom units and 12, 2-bedroom units but the rent averages out to only $412/month per unit.

In 3 years we were able to increase the rents to an average of $805/month per unit (and we actually spent less than $10K/unit in improvements). I will write a more detailed breakdown in a separate post but below is the screenshot of the numbers:

In fact, the above spreadsheet jive with the appraisal we got for the property - it appraised for $2.1M. 

So that's it. Doing value-add deals is the key to buying and owning thousands of apartment units.

(Now a word of caution: as in any strategy, you have to know what you're doing and there are risks and pitfalls. But that's too much for me to cover in 1 forum post.)

 Great job Michael.

@Michael Ealy

This is Swanny. I was in BP Podcast 238. I totally agree and have done the same in NE Ohio. I buy undervalued Apartment Complexes in solid C+ and B neighborhoods. I highly urge people that want to transition to 5+ units or more in one complex to invest in a few deals first, where the leads in the deal will explain and teach you what they are doing and how they are doing it.

There are lots of land mines to step on if you don’t have a solid team in place that have been there and done that. Remember, it is just as important or more important who you know. What you know is foundational. However, who you know is the key to have people that will guard your money with their life and teach you along the way!!

I always leave my phones available to talk to BP members from 3:15-6:15 pm. during the week. That’s PST. I live in San Diego. Message me and I will get back to you.

Swanny

Originally posted by @Raman Saka :

@Michael Ealy Really great discussion with very practical tips.

We talk about numbers and profits on current deals, all that is great. But there is another very important number. The number of years you have given to building the networks and learning the in's and out of this business. Also its not just the numbers of years. Its the passion the drive and what else ( did you / can you give up) to be successful at this business. I know I am saying this to myself a lot these days -- Patience is a virtue.

I have a Corp IT job, there are days when laptop screen is the last thing I want to see after 10-12 hrs of meetings and discussions at work. But still that urge to get better, to have a bigger portfolio gets me back to the computer. BP has been a great resource, I keenly reviewed the Michale's land contract deal which generated $640 k profit. This and many other such threads work as goal posts for me. They have inspired me to get to 10 doors (mostly SF) and enabled me to get my first 2 unit duplex last year. Its hard but then I will not trade that experience of going thru it for anything :) 

Thanks Please keep sharing your insights.

You're very welcome Raman.

I will keep sharing as long as there are people like you who keep appreciating it.

Congrats on your success so far. It seems slow in the beginning but accumulating your portfolio and your passive income will increase exponentially over time.

 

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