Investment Info:

Large multi-family (5+ units) buy & hold investment in Duluth.

Purchase price: $225,000
Cash invested: $200,000

Contributors:
@Mike Sevcik

8 Unit, brick town-home style building adjacent to downtown Duluth. Building needed a lot of mechanical upgrades, cosmetic work, and had a lot of deferred maintenance. Construction is now complete and the building was fully leased up within 9 months of acquisition.

What made you interested in investing in this type of deal?

Prices in the Twin Cities were on the rise. Comparatively, prices were lower in Duluth, but rents were higher in relation to purchase price. I was looking for more multi-family opportunities at the time, and this happened to show up on the MLS.

How did you find this deal and how did you negotiate it?

This deal showed up in the wrong part of the MLS. It only had a grainy, old picture, and the purchase price was almost too good to be true. Through a few back and forths with the seller's agent. We submitted an offer. It was initially not accepted. They chose to work with someone else. About a month went by, and I received a phone call from the seller's agent. We submitted another offer, went to tour the property, and began working towards closing.

How did you finance this deal?

Conventional financing with an interest only construction loan. Loan was converted to a 25-year amortized loan at the end of construction.

How did you add value to the deal?

Lots of places. The building was really falling apart, hence the low sale price. We had hoped for a little more life out of the roof, but after a heavy winter snow season, and below average cold keeping the snow from melting, the roof needed to be replaced. Unexpected but glad to have a new roof. New electric, plumbing, and heating systems were added, and cosmetic updates like new flooring, cabinets, and paint.

What was the outcome?

A well-located cash-flowing asset in Duluth! We love that there is a lot of investment (around 1 billion dollars) in the hospital system about 3 blocks from our property.

Lessons learned? Challenges?

This was the biggest property we had tackled, and there was a lot of efficiency in having the building mostly vacant when we acquired it. We learned a lot about having the proper contracts in place, and having specific language and consequences for not performing parts of the contract. We had issues with a basement full of personal items left at the property, but held money in escrow that was not to be sent to seller until basement was cleaned out. Get it in writing!

Nice work, Eric! Did you have a relationship with a construction company in Duluth already, or how did you find them? That's been my biggest challenge so far; finding a GC to work with on larger projects. 

Heirloom Property Management has worked with us on the rehabs of the properties. They manage our properties up there as well. It's nice to work with them because they have an eye on the post-work side of things. I've got a few names/contacts of GC's if you want to drop me a private message. 

Love to see an update on this property. The low list price caught my eye as well. Glad to see it rehabbed and worked out! 

Wondering if you were able to leverage the gain in equity from construction to minimize the cash needed to invest in it? Or refinance out? 

(ex: PP $225K + rehab $200K = $425 basis, assume for example ARV appraisal $500K (dependent on NOI & cap rate), lender gives you 75% LTV = $375K, basis $425K - 75% LTV $375 = $50K cash to close? Versus standard $425K @ 20% downpayment = $85K cash to close

@Sam Torvinen it appraised for $540k after repair and lease up bringing rents up to market. We needed to bring about $90k up front for the initial acquisition and construction loan. We were able to cash out refi and get back our initial money down. In short, we weren't able realize the gain in equity until construction was complete.

And yes we too were really drawn by the price, but oh man, it was a lot more work than we anticipated. It was a really awesome learning opportunity.

What is your gross rent revenue?  Congratulations on the deal!!!  

Originally posted by @Moises R Cosme :

What is your gross rent revenue?  Congratulations on the deal!!!  

Thanks! The building grosses about $6100 per month and tenants pay their own expenses. There are also two coin operated washers and two coin operated dryers in the basement. 

Eric, excellent project.  Just went through a similar experience with a smaller building.  Great deal!!! Doing all the work up front will pay off - you can depreciate most of the renovation, you went interest only so you get that as a tax shield....  You got all of your money back and in the end you are making good money monthly.  Stud purchase!!!  

Eric,  Great job and I second @Sam Torvinen . Would love to see and update and photos of this property. We lived in Duluth while my husband went to school there. We love Duluth and welcome an excuse to get there more frequently. Purchase prices and cash flow are way better than other areas we are interested in. 

We're currently looking to find a multifamily there to do something similar. Would love to chat with you more about your experience and investments there. Sending you a pm. Again great job and thanks for the inspiration. 

This was a great success story. Thank you for sharing. Good to see people making it in Duluth!