All Forum Posts by: Lucas Miles

@Nicholas D. another factor on ACV vs replacement cost value would be events where there isn't a total loss, example hail damage requiring replacing the roof for 15k. Replacement cost you should get the 15k (minus your deductible), ACV factors in the actual value of your roof through depreciation. If you roof is 15 years old, insurance company could determine you will only receive half of the 15k due to the age of the roof. Comes down a bit to your risk tolerance, and do you have reserves to cover major events that aren't a total loss. 

@Bruce Woodruff We did go to the city council and they declined to change the pricing. 

@Jenny Caldona Do you know what law/statue these buildings are protected under?

@Josh Oaten The $90 are base fees, so not based on our usage. The amount they are charged us for the usage is very small so isn't a factor here at all. Passing the water bill to the tenants, isn't done at all in our area so would hurt our vacancy. 

Thanks for the responses! 

@Jalpan Jangiani This probably comes down to how much of a down payment you can afford. If you can afford either a duplex or a 4 plex, then I would keep your options open (duplex, 4plex, triplec etc). Managing a duplex vs a 4plex isn't much difference, so I wouldn't limit yourself to only a duplex provided the financing isn't an issue. Focus on finding a great deal!

@Gage R. Reach out to your lender to see what your options are. You will have to get a "new loan", whether your lender will put combine both properties into 1 loan vs 2 separate loans. Main factor will be interest rate, if your current loan is a lower interest rate, you should probably keep that one separate and get a new loan at today's rate (which will more than likely be higher), other than that there really isn't much difference in combining into 1 loan vs having 2 separate ones. 

Investment Info:

Large multi-family (5+ units) commercial investment investment.

Purchase price: $2,000,000
Cash invested: $30,000

Portfolio of multifamily buildings in rural communities across Southern MN. 96 units total in 5 buildings. Off market deal I found through cold calling. I brought in another local multifamily investor, and we partnered on this deal. We ended up "double closing" on a 8 unit building, and still own the remaining 88 units.

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

Own other properties in the general area, local communities have a shortage of safe, quality, and affordable housing. Purchase price of ~20k/unit I knew would make money assuming could get through rehab without running out of money!

Properties were in fairly rough shape, vacancy around 70% physical occupancy and closer to 60% economical occupancy, with rents 20%-25% below the market, and an overall poor class of tenants. There was significant value add upside.

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

Found through cold calling multifamily owners in the area. Seller wanted to sell all of her properties in the area at once. She wanted 2 million, said the only way was if she would finance the remaining 20% in 2nd position, she agreed, and we negotiated to have this be interest only at very small interest rate. During inspections we found a sewer drain that needed to be relined, and a roof with hail damage, we worked with the seller to get these addressed prior to closing.

How did you finance this deal?

Commercial lender of a local bank provided 80%, seller the remaining 20% in 2nd position interest only for 3 years. Lender over funded our 80% to give us money for rehab. Sold the 8 unit, and lender let us use these proceeds to go directly into rehab. Will get a 2nd from the lender to pay off the seller in 2-3 years. Each partner kicked in 30k or so in MISC startup expenses. So really no substantial money out of pocket and no private money involved for this deal.

How did you add value to the deal?

Our management team kicked out the bad tenants. We rehabbed all vacant apartments, and brought in new quality tenants.

Trimmed trees, added lighting (interior/exterior), patched parking lots, cleaner landscaping.

Fixed all deferred maintenance items, vacant apartment gets new flooring/paint, new toilets and fixtures, counter-tops/cabinets as needed, and fixed any broken items.

What was the outcome?

6 months into ownership we have turned about 30 units, almost doubled what the revenue was at closing, and have met our proforma revenue. We still need to rehab/fill a handful of apartments, complete some Capex type projects, dial in our expenses, but the buildings are outperforming what are expectations were at this point.

These properties had terrible reputations and were in rough shape, but we are now proud owners of cash flowing buildings that are in the hands of awesome management team!

Lessons learned? Challenges?

Importance of partnerships, I could not of tackled this big of deal by myself at this point in my investing career.

Rehab went a lot slower than expected, management company is not a project manager. We hired a handful of "handyman" and we were involved with the "project management" type work during major rehab. Over budget for rehab, something will come up.

Weekly meeting with management company, and all effort into fostering this relationship.

Purchased 2 small multifamily buildings in a very small rural town in Southern MN recently. The city is billing us $90 in base fees for every apartment (then in additional also a water usage rate), so 20 unit building we are getting billed $1800 + usage. There is also an assisted living retirement building in the town, the city is billing them only 1 $90 base rate for the entire building (not per apartment). Buildings are setup identical, 1 water meter in the building. We use 50k gallons of water is costs us ~$2000, they use 50k gallons of water they pay ~$200, obviously drastically unfair, (and extremely expensive for us) These are the only apartment type residences in the town. 

We have approached the city asking them to change this billing to make it fair/affordable, they declined saying the assisted living building is "grandfathered" in to pay the 1 base fee. 

Looking for any guidance for anyone that has dealt with a similar situation before, or if there are any legal precedence we can take. Thanks in advance!

@Matthew Hollister For a commercial property an appraisal is typically based on 2 things: 1. Comparable sales (can be difficult to find in smaller towns) 2. Income approach. I would focus on the income approach for your analysis. Appraised value = NOI / Cap rate. NOI = net operating income is how much $$$ the property produces before you pay any debt service (so before you pay the mortgage). You can look up more information on cap rates, I don't know the area you investing in but assume a cap rate of 8%. Based on the numbers you provided, the current appraised value = 80k / 0.08) = $1,000,000. If he is willing to sell at 475k, either 1. the numbers he is providing are incorrect, 2. property needs extensive rehab, or 3. you have a homerun of a deal, I would guess 1 or 2. So more investigation needed on your end to understand better what is going on.

When purchasing the property a bank will typically give you ~75% of the purchase price or ~75% of the appraised value (which ever value is lower). So if you purchase it for 475k, the  bank will give you ~356k, and you will need to come up with ~119k to close. 

In the future if you wanting to refinance the property (to pull out the cash you invested) the bank will likely do a new appraisal. So they will look at the new NOI (assuming you were able to increase rents). And assuming your NOI has increased, the appraisal will come back higher, and the bank will give you a new loan at 75% of this new appraised value.

@Shane Farmer If both of them are listed, it would likely be easier for the seller to sell both at once, only have to deal with 1 buyer, close at the same time, etc. So really isn't any special negotiating you would have to do there, assuming you are able to close on both at one time. Make sure they know that you own other properties in the are, and that you will close. 

For the other properties they own, see what their time-frame for selling the rest of their portfolio is, and why they are holding on to the rest. Work with them to figure out why they are interested in selling, and what way you could best help (buy 1 a year to spread out capital gains, buy all at once so they are done being landlord, etc).

@Chase Whiteman I wouldn't worry to much about rates increasing with the variable rate HELOC, if rates going up a bit makes/breaks your deal, then you need to find a better deal. The "BRRRR" method would be to, buy the property, rehab it, rent it out, then refinance it. Assuming your rehab improved the value enough that when you refinance you are able to pay back the HELOC that you took out. Your HELOC is then paid off, and you ideally have locked in long term fixed rate financing. Why do you need hard money and a HELOC? Say you buy property for 100k, bank gives you 75k to buy it, you will need to come up with 25k, so use your HELOC to fund the remaining 25k (and any rehab if you need to). Hard money is typically more expensive, especially compared to your HELOC.

@Dane Davis you are likely not going to find a lender that will provide some type traditional "loan product" that allows you to have no money invested. A "no money down deal" is developed through some type of creative financing. Few examples of how this is possible: 1. Seller provider you 100% of purchase price (highly unlikely). 2. Bank provides 75% (or whatever loan to value they can loan to) of purchase price, come up with the remaining 25% from someone (seller, hard money lender, private money investor, etc). These situations required either a highly motivated seller, and awesome deal, or both. The typical property you find on the MLS you won't be able to make the numbers work, especially with no money down.