If you’ve been following me for a while, you may have joined me when I decided to make the leap from building a large single-family portfolio to a multi-family portfolio.
This 40+ unit apartment building was one of my first multi-family home dives. It yielded many learning points, but also turned out to be a great success.
We have gained experience going through the full cycle of the property from purchase to renovation and departure in just 18 months.
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Imagine being friends with hundreds of real estate investors and entrepreneurs. Now imagine grabbing a beer with each of them and talking casually about failures, successes, motivations, and lessons learned. That’s what we strive for with The Pyjama People Podcast.
Finding and negotiating the deal
In 2017 we found an off-market building in an up-and-coming part of the city. The $ 1.4 million listing had previously been withdrawn, but we were able to track down the seller through skip tracing.
The seller was initially difficult on price. Thanks to the great input from other investors here at Pyjama People and locally, we were able to negotiate a very attractive deal. We ended with a $ 900,000 contract price and seller financing.
The good price that came in helped us because unexpected scenarios popped up after purchase. A boiler went out, costing us $ 20,000. In addition, we were working through one of the worst winter months, which delayed construction.
In my experience, going straight to the owner saved more than seven figures on deals as we avoided the competition between on-market deals. Especially in the current market, where people often pay more than what properties are worth.
If you start a bad deal by overpaying, you may have just dug a hole that you might find difficult to get out of later.
We planned to keep this property longer for cash flow. Then we got a buy offer that we just couldn’t refuse, and it seemed like the best choice for everyone involved.
So instead of refinancing, we sold. At the time, it was the right move to do our best for our investors and deliver them good returns.
Rents on the site had skyrocketed and spending was difficult to keep down. As it was a seller’s market the decision was made to take the opportunity and sell.
We eventually negotiated a gross sale price of $ 1.85 million, which was $ 1,709,981 after all costs. That allowed us to pay off all the financial leverage we used and deliver a 16.3% return for investors, which was well within the range we expected for them. Not bad considering we were in and out within 18 months.
Our purchase price was $ 900,000. We funded the seller with $ 200,000 lower and budgeted $ 485,000 for improvements. We were all in for the property for a little over $ 1.4 million, as we were a little bit about the rehab. With all costs and the sale at the end of the day, the net breakdown was $ 310,626.76.
Lessons from remodeling and leasing
Managing a project of this size was quite an undertaking the first time. Entering without dedicated on-site leasing and maintenance personnel, it was probably more management intensive and slightly more expensive than it could have been.
Our experience is that it is even cheaper to move into a home with even more units, so that you can deploy staff on site to manage the home. There is a much better ROI on time and fewer moving parts within your company with employees when you purchase one complex of 100 units instead of 100 single-family homes. I’ve done both, and going with multi-family homes and more units just makes the most economic sense.
Time and budget
As with everything in real estate, everything took longer and cost more than expected.
It took longer to renovate and release each apartment so that we could reach an occupancy rate of 95%, up from 50% when we bought it.
We have given the property a complete makeover, including signage and renovating the interior of the unit. If you’re dealing with a commercial building of this size, you’ll also learn that your surpluses can get big quickly – say, a single boiler that added $ 20,000 to the rehabilitation budget.
We had added an emergency cushion for interior renovations. To be on the safe side, that should probably be greater if you’re dealing with an older property with deferred maintenance.
Make sure to add lots of kisses to your build numbers. Renovating through the winter in colder markets can also cause delays. Perhaps the same as trying to renovate properties in the south during hurricane season.
1031 barter buyers
This buyer happened to be using a 1031 power plant. It turned out to be a great experience for us as they were able to defer their taxes on a previous sale into the future. We would certainly have to deal with this type of buyer again.
The value of taking action
Before we bought this deal, we didn’t have all the answers. We had a business plan. However, we had to figure out a lot of things along the way.
People often feel like they need to have 100% of the information with the deal and never take action afterwards. That’s just unrealistic. When you take action, you want to be calculated and protected from risk, but there comes a point where you have to make the leap. No matter how well you’ve set your plans, things will always change.
Just like making the leap into real estate in the first place, the decision to jump into a multi-family home turned out to be a great move.
Jumping into a multi-family home can be scary, even for investors with experience on the single-family side. Waiting on the sidelines doesn’t help, however. The best way to learn is to do it. If you want to exceed your results, taking massive action is the way to go. Seek partnerships and mentors to mitigate the risk of such a venture and build in more protection against the negatives.
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