All Forum Posts by: Reed Rickenbach

Sounds great just give me your bank info and I'll send a wire. 

@James Wachob at Foundation Property Management. Awesome team. 

I like to look at the proforma stabilized performance first, and work backwards to the amount of unit turns/capital improvements it will take to achieve. 

For example, if you're purchasing a 6-unit that needs $40k in exterior renovations & $7k/unit interior.. will you be living off of the cashflow in month 2? No. How about in 18 months when the property is stabilized? 

I make sure to account for the entire value-add plan (having enough to capital to weather the 18 months with minimal occupancy & completing renovations) and look at the total picture from that point. 

At month 18, you'd have your down payment + renovation cost invested, as well as any operating costs from negative cashflow. Divide your annual cashflow once stabilized by your total cash invested to get your CoC return. Or refinance your cash out. Lots of ways to do it but in general you need to be well-capitalized to turn a property around.

As long as you're well capitalized, I think this is a steep learning curve worth taking on. Improving financial performance of multifamily is the name of the game! 

I do this specifically with multifamily, although this isn't typically a strategy that new investors start with. One thing I'd make sure of is that you're buying the property at a price that is based on CURRENT performance, not proforma performance. If you're paying a proforma price with current rents, you're essentially doing all of the work to get the property stabilized for free. 

Investment Info:

6-Unit Value-Add Apartment Building in East Memphis. 2 One Bedrooms, 4 Two Bedrooms. 1965 Build. 

Purchase price: $400,000
Cash invested: $71k to close, $72k proforma renovations (interior & exterior). 

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

After 4 years of investing in single-family homes, I wanted to take the leap to value-add multifamily. I work full-time as an Asset Manager for an apartment operator, so I was ready to put some knowledge to use with a personal investment. 

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

I had previously sent this owner a hand-written letter after driving by this property, however a wholesaler beat me to getting it under contract. A wholesaler I was familiar with sent me the deal. 

How did you finance this deal?

15% down from a local lender I have had a relationship with since 2019. Had cash from liquidating most of my single-family homes in 2022. 

How did you add value to the deal?

Taking average rents from $475 to $900 via interior & exterior improvement. Seller had not raised rents since 1995. Property will undergo exterior paint, new roof, new fence, & full interior renovations (adding laundry). 

What was the outcome?

Proforma outcome is to increase NOI from ~$27k (current) to ~$48k over 2-3 years. Depending on cap rates in 2024-2026 the property could trade or appraise for $650-850k.

Lessons learned? Challenges?

To be determined!

Get a bid that includes labor & material from a reputable GC. Make sure the contract states that the quoted amount for the scope is firm and will not change. Typically there is a 3-10% allowance for material cost increases, etc. but if the contractor has enough meat on the bid he/she will typically freeze the price. 

Fed funds rate pushing higher, lowering inflation, can decrease the 30-year mortgage rate pretty significantly. 30-year mortgage is more closely tied to inflation expectation than the Fed funds rate.. but no one really knows. 

I see most current underwriting expecting the 4's by Q4 2023 or Q1 2024. Haven't seen anyone expecting rates back in the 2's or 3's any time soon.. that would be a crazy assumption. 

However I'm sure a lot of underwriting in 2020 - 2022 included rates staying historically low. 

I did this in my second year of investing. Being able to write your own offers is worth it in itself. There are plenty of brokers who will let you pay a monthly fee or a % of commission to hang your license with them. It is probably more common than you think. I'm sure you know of investor agents in your area - talk to them about this structure with their broker or ask for suggestions. Very common.