I Bought 44 Units for 25 Cents on the Dollar

by Stuart and Laura Harris, Carthage, NY   

Ed Garcia and Terry Vaughan,

This letter is long overdue. However, it's partly your fault for providing such an excellent workshop on creative financing [How to Get Lenders Fighting to Give You Money].

I've been so busy working on the apartments, I haven't had a chance to do much else. Since mid-March, I've had 35 apartments rented. I still have eight more to renovate, but they're going well. I delayed them so I could fix some of the plumbing problems. While challenging, this project has provided invaluable experience and a million dollar asset with almost none of my own money.

I would have never even considered this project without the tools you provided in your course. In my opinion, anyone interested in real estate investing would be crazy not to attend your workshop.

How to get the money to do more deals!

Your workshop fills a big void--namely getting the money to do deals. We'd done some investing in real estate using a home equity loan. But it quickly became obvious that we needed much better knowledge about financing to really be active in real estate investing. I started looking for courses and came across yours. The first one I tried to get into was already full, but the wait was well worth it.

We learned about this apartment complex in the course of checking out tax auctions. We've been attending auctions for several years and have purchased a number of properties. I started by just buying vacant land, for summer camping trips. I then noticed that a lot of the properties went for quite a bit lower than the retail market.

I realized I could make this work

After attending your workshop, I realized that I had to be a cash buyer. I realized that the commercial buildings had even fewer buyers interested in them and that they sold for 20 to 30 cents on the dollar--even fewer cash buyers for these buildings. This 44-unit apartment complex was just this type of property.

At previous auctions, I've just ignored these properties because I knew I had no way to get financing for them. I knew that I could supervise the renovations and put the pieces in place to manage the tenants; all I needed was the funding. Since this is a "fixer-upper" project, it may not be for everyone, but the same ideas apply to any kind of real estate.

The apartment complex was assessed for $1.15 million. When I did the analysis, I estimated that I could get the value up to $1.5 million. Based on those figures, we attended the auction and were the top bidders $287,000.

Despite what we'd learned, Laura still didn't really believe it and scheduled a meeting with the bank before we were ready to present them with a believable story. Naturally, they weren't interesting in financing the apartments. So, I worked with Terry Vaughan to put together a note with terms that would be attractive to a third-party investor and ran an ad in the newspaper.

It was as simple as asking for the money

I just had to know how to ask! I got two calls from investors who were interested in providing financing. The note was for $265,000, at 13.25% interest, six months of prepaid interest, then interest only payments after that with a balloon payment after 18 months. We also added an exit bonus, which I should have saved in case I needed to negotiate more, but it worked fine as it was.

With current occupancy, I should be able to obtain bank financing in the next several months, almost a year before I need to. Once the initial work is done, we'll have between $500,000 and $700,000 in equity and a net cash flow of $100,000+. Amazing!

My most recent analysis puts the apartment complex value at $349,000, based on 35 units rented and a 10% cap rate, so I still have work ahead. Most of this is due to inefficiencies that can be corrected.

For example, I've installed digital timers that automatically adjust for sunrise and sunset, and I will soon be separating the wiring for inside and outside lighting. (Access to the apartments is through inside hallways, for which I have to provide lighting.)

According to my calculations, if I keep the outside lights off only two extra hours per day, it will pay for the timers in only one year. This reduces the utility expense and the cost of having someone manually change the old mechanical timers every two or three weeks in the fall and spring.

Knowing how to value the property has helped me target those areas that will improve the value of the property, making this asset even more valuable. The planned improvements should also help justify increased rents in the future, which are currently $450 + utilities.

The renovations

My main focus was to do only that work necessary to get the units rented as fast as possible and put off anything that I could do while tenants were there. The apartment complex was built in the 1970s, and had the older 3 gpf (gallons per flush) toilets and avocado green fixtures. Most of the bathroom cabinets were old, pressed board, and were coming apart.

I found that the toilets had not been well maintained and that most of the flooring around the toilets had rotted out. In the first set of renovations, we replaced all the toilets with the 1.6 gpf models, replaced the bathroom cabinets with Sunco brand, tore up the floors and replaced all the rotted plywood and put down new vinyl tile.

The bathtubs were not replaced because they were still functional, just ugly. They are also a lot of work to replace and would have put me outside my budget in time and money.

The mirror units and tub surrounds are also old and ugly, but we can change those out while tenants are renting the units, so they'll be scheduled for replacement over the next year. I also need to replace the tub faucets with pressure-balanced faucets to keep people from being scalded in the shower.

We replaced most of the kitchen floors because the linoleum had worn through the pattern. All of the stoves were old, small, off-brand stoves. Most had burn marks on the sides due to bad seals. We replaced them with nice, self-cleaning ovens. When I compared the cost, it didn't make any sense to go with something cheaper that would detract from the appeal of the kitchen.

About 50% of the carpets were replaced immediately, and we'll replace the remaining carpets over the next year or so. I was able to find a good carpet source and got the cost of carpeting an apartment down from $1500 to about $950.

The final eight apartments are all on the first floor. I scheduled them last because I need to fix the plumbing first, especially since I pay for the hot water. The old plumbing was galvanized pipe. The water came into the building, to a hot water heater, then the pipes went back underground, to the four corners of the building and up again.

So, the hot water went back underground to be cooled off again before getting to tenants. I'll be moving the pipes from underground up into the ceiling and using the most direct route to get hot water to the apartments. This will reduce the cost of hot water, use less water, and put the pipes in a location where leaks are obvious, so they can be fixed.

There have, of course, been surprises. Like the bathroom flooring being rotted out and the 5000 gallon per day leak in the main water line, which we replaced. But for the most part, things have gone well and I've been very pleased with the progress and results.

I need to get regularly scheduled maintenance kinds of work in place (like vacuuming the hallways) and put together a system for ongoing maintenance. I've put these off to some extent because I still need to be here to decide which improvements need to be made and decide how I want to structure the work before I turn it over to a management company.

Being the on-site manager, I've heard all the horror stories of the previous managers, which has given me a number of ideas on how I want the apartments managed in the future. Please accept my sincere thanks for sharing your knowledge for success with us.

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