82 Unit: Big Problems Can Equal Big Returns
Investment Info:
Large multi-family (5+ units) buy & hold investment in Richmond.
Purchase price: $2,450,000
Cash invested: $700,000
82 C class multifamily units, 2 buildings
64 unit: 2 bed 1 bath units, 750 sqft
18 unit: 1 bed 1 bath, 700sqft
What made you interested in investing in this type of deal?
Because I'm a glutton for punishment. Jk. But seriously. My friend Andrew Cushman (BP podcast 279) describes C- (D) properties this way: "the grass is always greener... over the septic tank. These properties look great on spreadsheets but are hard to manage." At under $30,000 a door, I was attracted by the prospect of being "all-in" including Reno around 35k a door and having 82 units performing as 2% deals... with pro forma rents of around $700.
How did you find this deal and how did you negotiate it?
LoopNet. The seller had two properties to sell and preferred to sell them together. I wasn't the highest offer, but I was willing to take the 18 unit as well as the 64 which enabled me to obtain a discount on both. The key to negotiation is finding out what is important to the seller, often it is not the highest price. The brokers on these types of properties cannot be your enemy in the transaction... once the terms are negotiated, you need to work together to get it to closing.
How did you finance this deal?
Local bank bridge loan. 80% LTC including renovation funds ($500,000). 5.25%, 1 Year IO, 5 year term, 25 year am. Local lenders provide great options for ugly ducklings like this, but keep in mind they will be recourse (exceptions exist), relatively short term, and often subject to arduous fees, inspections, draw structures, etc.
How did you add value to the deal?
The 64 unit was in very bad disrepair. Our plan was to turn 30 units in the first year, we ended up turning 30 in the first 4 months when many existing tenants refused to abide by the terms of their leases. While this presented cash flow problems early in the reposition, the result was increasing income a lot more quickly than we had projected. Old rents were $550, new rents are $675 with an added fee for water. We have decided to digitally submitter water to mitigate loss risk and increase $$$.
What was the outcome?
We are up to 90% occupancy at the troubled property which is amazing. We're turning the units for about $5,000 per unit which includes new LVT in the common areas, carpet in the bedrooms, 2 tone paint, and cabinets and appliances on an as needed basis. We still have ample funds to complete the remaining units as well as improve the curb appeal. We partnered with the city of Richmond and donated $25,000 in security cameras to improve the neighborhood which have been used to convict a murderer.
Lessons learned? Challenges?
In C- or D properties, be very well capitalized just in case you experience the same massive vacancy that we did. Management is tough, but it can be worth it. We are truly changing a neighborhood and achieving great numbers for our partnership. It's not for the faint of heart!
Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?
Dodson Property Management, Richmond VA
