Hey BP Community, my partner and I wanted to share our story about how we bought a 5 unit building with none of our own money. This is a long post, but well worth the read if you’re looking for a little inspiration or more importantly, to learn the steps so you can do it too! Now let’s start.
I think it's important to set the stage and share a little bit about ourselves. My name is Mike Doherty, I have been an active real estate investor for 5 years now. I have lived in two separate house hacks, completed a BRRRR, a Flip and have amassed a small portfolio of 12 units over the past couple years. My partner Ryan Deasy, creator of the site ‘RentReddy', has been a long distance landlord, writer of countless BP Blogs, and a rental property investor for the last 8 years. His business model of renting by the room has allowed him to scale up to 16 doors very quickly. You can read more about him HERE. I share this with you because neither of us are ‘gurus’ or seasoned real estate professionals. Just a couple young hungry gents who each have some knowledge and experience to bring to the table. Now that is out of the way… let’s get to the deal.
Deal 1:
We were approached by a wholesaler to purchase a 4 unit building in New Britain, CT. After viewing the property and analyzing the numbers, we agreed on buying the building for $220,000. The majority of our separate portfolios are in New Britain, CT so we know this segment of the market well. In its current condition without any work we estimated an ARV of $315,000. Since I am an active real estate agent, we were able to pull comps directly from the MLS to help arrive at this number. If you don't have access to the MLS, get in touch with an agent or become resourceful on other real estate platforms/ town sites.
We were able to get an amazing under market deal and move quickly because we were willing to pay CASH. We had already lined up a private money investor to fund future prospective deals with us. Relationships are paramount to success in real estate and in any endeavor for that matter. Because we had already formulated trust and a relationship with the private investor, we were able to execute and move on this deal before anyone else. I cannot stress this part of the process enough - Line up a LOC or HELOC or Private investor before you come across a deal. After presenting the numbers and negotiating terms we settled on a 95% LTV for this particular property. This meant our investor was going to invest 95% of his own money while we only had to bring 5% to the table. Moreover, we split 5% down on a 220k purchase which was $5500 EACH plus closing costs. As you may know, there's no ‘Free Lunch'. We paid 3 ‘points' at closing and had a 12% interest only rate with no prepayment penalty. This was a buy and hold property and the plan was to increase rents slightly, perform a cash out refinance, make our investor whole and use the cash flow to invest in other deals.
Deal 2:
About 1 week into owning the 4 unit building, mentioned above, Ryan was able to connect with the owner of a 5 unit building in New Britain, CT. Specifically, he connected through direct mail marketing using DealMachine. The card he sent out read exactly this:
“Hi (Owner’s Name), do you have any interest in selling this property?
If you have any interest at all in selling, please call or text me at (Phone Number). I would just need to take a quick look at the property and then can make you an offer within 24 hours. I can also close quickly and live right in town!
Have a great day!”
After a short phone call, he agreed to meet us at the property and show us around.
This property was a total of 5 units: 4 residential apartments, 1 liquor store and a brand new 4 bay garage. Everything about this building was well kept. Quick note- if you haven’t listened to BP Podcast episode 409 with Steve Simms, I highly recommend it. The whole premise is understanding what makes someone tick…. When they ask you a question, what are they truly asking? After building some rapport, listening to the owner, and utilizing some of the skills mentioned in the podcast, we were able to uncover what he really wanted which was: to not bother tenants, avoid capital gain tax and an easy transaction. Through asking the right questions, we were ultimately able to agree on a seller financed deal.
This particular seller was older, owned the building outright and didn’t NEED to sell. Some questions to ask an owner when considering what would make a good seller finance deal are….
1. Is the property paid off?
2. Is the seller educated and familiar with the benefits of seller finance or the tax burden if sold outright? If not, lay out all the benefits.
3. Do they need the money to 1031 exchange or is this the end of their investing career?
Lo and behold, after some negotiating, we came to a seller finance agreement. The terms of the deal are below:
- PP: $310,000
- Down payment: 10%
- Interest Rate 5.5%
- Amortization: 30 years
- 2 year balloon
While we knew this was a great Buy and Hold with very favorable terms, the challenge was coming up with $31,000 dollars + closing costs. Given how hot the market is, we decided to sell the original 4 unit building (deal 1) we bought a week earlier and 1031 exchange into the new 5 unit building. We were able to find a buyer who ultimately purchased the building for $285k… a great deal for them and a quick sale for us. We could have waited around and got closer to the ARV of $315k, but there is an opportunity cost to everything and we valued a quick sale over a higher price. The entire 1031 process, from finding a buyer, to closing on the 4 unit, to eventually 1031 exchanging into the 5 unit took roughly 60 days.
**PRO TIP**: IRS guidelines say you have 45 days from the sale of your property to ‘identify’ your new building and ‘180’ days to close on it. This is not legal or accounting advice so please be sure to consult your local attorney and accountant!
Here are the numbers…. because, I am sure that is what you have all been waiting for:
Property 1:
4 Unit Building
- Purchase price: $220,000
- Total investment (5% down plus closing) = $21,000
- Monthly rental income: $3,630
- Unit 1: $1,000
- Unit 2: $900
- Unit 3: $900
- Unit 4: $830
- Interest Only Monthly Payment: $2,090
We sold this property for $285k with $5,700 in seller credits. After paying off our investor we netted $63,891.18 not including the two months of rent we collected!!! We rolled $53,891 into the 1031 exchange and kept $10,000 of the sale proceeds to have some cash on hand. Therefore, we ultimately will have to pay taxes on the $10,000.
Property 2:
5 unit building
- Purchase price $310,000
- Downpayment: $31,000
- Closing Costs: $3,563
- Current Rental Income: $2,600
- Liquor Store: $1,200
- Unit 1: $700
- Unit 2: $700
- Unit 3: $0
- Unit 4: $0
- Garage (4 bays): $0
- Future Rental Income: $6,400
- Liquor Store: $1,200
- Unit 1: $1,200
- Unit 2: $1,200
- Unit 3: $1,200
- Unit 4: $1,200
- Garage (4 bays): $400
- Seller financed monthly payment (Principal and Interest): $1,395.74
- Projected cash flow: $2,000 a month after accounting 5% for vacancy, repairs, cap Ex and 8% for management which we intend to self manage.
Because we had already escrowed $53k from the previous sale, we ended up putting more down on the new property than the original discussed amount of 10%. Furthermore, all $53k was used towards closing costs and down payment.
In summary, we sold the 4 unit and used our profit of $63,891 minus the $10,000 we kept to 1031 exchange into the purchase of the 5 unit - effectively coming $0 dollars out of pocket. If we didn't 1031 exchange we would be looking at a $15,750 dollar tax bill for next year. This is such a powerful tool many real estate investors use to defer taxes. Keep in mind if you sell and retain profits you will have to pay taxes eventually. They do not go away unless you die, in which case your heirs may receive a stepped up basis.
I hope this helps you with your personal journey. Thank you to all those who have shared their stories and experiences over the years.
