The Joseph, a 153 unit case study

Before & After at The Joseph
A case study of our apartment community in San Antonio, TX

I love investing in real estate.  Seeing a property transform from a dated apartment complex to a fresh, modern and welcoming community is a unique experience.  And knowing that you’re a part owner in the process? Is an incredible feeling and fills me with pride.

Let’s take a look at some of the work that was done to transform one of our investments in San Antonio.

BEFORE: The community began as The Gables, a 1980’s vintage apartment community that welcomed guests with this dated sign…

AFTER: …and was rebranded as The Joseph @ Huebner – with a fresh and welcoming sign that screams ‘this is a modern apt community, check us out!’

BEFORE: The exterior of the buildings were transformed from this dated look…

AFTER: …to this sharp and modern color scheme with bold accents.

BEFORE: The Leasing Center underwent a complete overhaul.

AFTER: …to this sharp color scheme with modern lighting, new flooring, paint, and fresh decor.

BEFORE: For the apartment remodels, the living and dining areas went from this dated look…

AFTER: …to this fresh and modern take with painted cabinets, resurfaced counters, new flooring, new appliance package, modern lighting, new faucets, and a modern but neutral paint scheme.

BEFORE: The master bedrooms also received a much-needed update…

AFTER: …to this fresh and modern master suite with new flooring, ceiling fan, painted cabinets with resurfaced vanity, and new closets.

The end goal in all of this was to create a fresh and vibrant community for our residents, along with more profitable returns to investors as the rents rise with the economy and our newly repositioned asset.

Good Deals Gone Bad

When Good Deals Go Bad

You know that saying, “know when to hold em, know when to fold em?”
That was me, and this property in Cincinnati I wrote about recently.  This was a great looking property from the numbers, it had an extra space in the ‘attic’ that was the size of a complete 2 br apartment (can you say free cash flow?!), the units commanded high dollar rents that shocked property managers in the area…

I had everything lined up, from the lending to professional management.  I even had the names of the neighbors in the area that watch over this street like they own it.

But then I got the property inspector’s report back.
*Pro Tip: ALWAYS get a property inspection done.

And as it turned out, that there was a lot of negatives on this property.  The beautiful remodel done to the penthouse unit? The floors were made with a ‘wall covering’ soft wood, that would scratch very quickly and need to be replaced down the road.

The electrical panels? Needed to be upgraded to modern standards to get insurance on the property.

Down in the guts of the property, inspecting the joists that HOLD UP THE BUILDING, there was some shotty work done where a ‘contractor’ sawed notches in the bottom of the 2×6’s in order to run wiring, causing them to be structurally unsound and downright dangerous.  I’ll repeat, these were HOLDING UP THE BUILDING and he sawed notches out of the bottom of them.

Now, none of these items scare me per se, but if you’ve read my earlier posts, in my business I simply stick to my numbers.  Structural issues can be fixed, flooring can be replaced, cracks in buildings can be sealed up and made whole again… BUT, the numbers must support it.   The expense must be offset by either the rents, or the seller needs to lower the price, or bring some money to the table to fix these issues before I’ll take control of an asset.  This is an investment, after all.  I want cash flowing in every month, at a higher rate of return than some stock market account.

The seller in this instance was unwilling to bring any money to the table in negotiations, and decided they’d rather keep the building in its current condition.

So I passed.  I folded my hand.  This good deal, turned bad.

And it was a great decision.

What does this mean for you?  Why does it matter?  I guess I just wanted to give you a live example and let you know that I’m not simply bringing you ‘any deal’ that comes up.  Yes, it cost me money to put this property under contract and perform inspections and other due diligence, but that won’t impact my decision if the numbers simply don’t work anymore.   My partners and I are constantly sourcing new deals, let me know when you’re ready to invest and we can talk about what opportunities I have available.

Active vs Passive: Which investor are you?

What kind of investor are you?

I know I’ve been somewhat MIA lately.  To be honest, I had some pretty tough life circumstances that have taken all my time and energy.  However, it brings up a good topic for this week.  How much time and energy are you willing and able to put into your investments?

As an ACTIVE investor, let me describe my day yesterday:
I’m under contract on a property in Cincinnati at the moment (that means I found this off-market deal, submitted an offer that was accepted and am now in the due diligence phase).  I was up at 7am to be on a call with my broker who was on-site, overseeing the property inspector and termite inspector who I hired last week to go out and inspect the property for me this morning.  I was also on call with a property manager that I sent over to the property to look at the property from a management perspective.

After the inspection, I had follow-up calls with my broker and property manager to get their reports on the property.  Then I went to work at my day job. 

On my lunch break, I had a call with my lender to discuss the details of the loan that I was agreeing to, as well as his take on the findings from the morning (he’s a local to the area and I always value local perspectives on any and all things real estate).  We also discussed a few other potential opportunities, as well as added a few contacts to my list for the area based on referrals from him.

I had a call with Andrew, the city building inspector regarding the newly required fire escape inspections on this property (turns out the inspections are so new that only about 50% of owners have turned them in, so there’s no rush, as long as their done ‘some time’).

All these people I have developed relationships with over the past 10 months that I’ve been actively looking at Cincinnati.

After work, I came home, signed a stack of loan docs, sent a few more emails, and here I am writing this article to connect with you.

As a PASSIVE investor, let me describe a typical day for me:
I wake up, play with my son, eat breakfast as a family, go to work, go to lunch with my friends, work some more, go to the gym, come home to my wife and son, watch some TV and go to sleep.

All the while, in Lexington, Kentucky, where I have a passive investment on an 84 unit property, the team has been busy replacing air conditioning units, remodeling entryways for 5 buildings, continuing work on landscaping, leasing units to new tenants, renewing leases and ending leases with others, replacing select windows that were noted during inspections, renovating the current vacant units with all new vinyl plank flooring, new appliance packages and refinished cabinetry, the list goes on.

All that work that went on? Made ME money.  And how much work did I do on that property that day as a passive investor? ZERO.

In a nutshell, that is the difference between active and passive investments.  Either you are doing the work, or someone else is doing the work.  Both paths can make you a return on your money, you just need to know what you’re looking for work-wise.  For some people, active is the way to go, but for many others, passive investing is ideal.  How much time do you have that you’re willing to put into your investments?

When you invest passively in large multifamily deals like we provide here at Amity Cash Flow, you don’t have to worry about the day to day ‘stuff.’ Your main goal is to look at deals that we open to investors, invest your money, and then collect quarterly distribution checks.   Let me know when you’re ready to invest and we can talk about what opportunities I have available.

Single-Family vs Multifamily Part 4: Selling A Property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

We’ve talked about the time it takes to buy a property, as well as the costsinvolved, and even what it’s like to own a property, but eventually, you may sellyour property. Today let’s discuss how properties are valued and why multifamily has an edge.  

Single Family Rentals (houses) are valued based on comparable sales in the neighborhood, aka “comps.”  A 3 bed 2 bath house that sold for $200k down the street, will give your 3 bed 2 bath house a comparable value of $200k as a good starting point.  Buyers then look at whether your kitchen has been upgraded compared to the recently sold house, how is your landscaping, your finishes throughout, etc.  All these items can add and subtract from the value of your house, and the price it may fetch on the market.
But there’s also a highly emotional element to these sales.  If the market is hot right now, your house may be worth more, since comparable sales are most likely higher and buyers feel a sense of urgency, but the same goes if the market is down, and buyers feel like ‘its not a great time to buy our dream house…let’s just wait.’ Or ‘We don’t love the paint color in here…We’ll pass.” 

What does NOT necessarily play into the sales price, is the ‘income’ this property produces, since it’s a home after all, not a business.

Multifamily properties (apartments), on the other hand, are valued as businesses.  Buyers are looking at the numbers, not emotions.  They want to know how much income does the property bring in? What are the expenses? And finally, what’s left over as a profit?  
A multifamily property’s value is based on that profit margin.  What can a buyer pay that will still yield a strong return on their investment?  This is a much less emotional purchase, and while it ‘kind of’ matters what other properties sold for in the area, the majority of the value is in the current performance of the property, as well as the potential for future performance of this business. 

Now, the beauty here is that you the owner can actually control your performance (to a degree). Raise rents $25/month per unit.  Offer covered/reserved parking for a $20/month fee.  Change your cable providers for the complex and save yourself $10/month per unit.  Install water conserving plumbing throughout the complex and lower your water bill.  Fill in that pool that doesn’t get used (and costs you money to maintain) and cut that expense completely.  In its place, add a dog park and charge tenants a pet fee, that they’ll be happy to pay since you now offer a dog park! Add coin operated laundry facilities and collect the profit, etc. etc.

As you raise your income and lower your expenses you turn a higher profit margin, and remember, buyers are offering based on what kind of profit the property can give them.  So they can now offer you more for your property since it is performing better based on your business decisions (not comparable sales or emotional buyers).

This is one of my favorite advantages of multifamily properties.  I don’t want to be dependant on comparable sales in the area when my property is running efficiently and kicking off a large profit! 

When you invest passively in large multifamily deals, you don’t have to worry about this on a daily basis, but it is something you want to understand so you can judge an offering based on their business plan.  Will they be able to raise rents, lower expenses, and ultimately raise the value of the property?  If you believe in the business plan and the team executing it, that will turn into a high-valued property that will put solid and dependable returns into your pocket.  

Single-Family vs Multifamily Part 3: Owning A Property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

We’ve talked about the time it takes to buy a property, as well as the costsinvolved. But what about owning and running your property?  Let me introduce you to one of my favorite terms, “Economies of Scale.”  Defined as: a proportionate saving in costs gained by an increased level of production.   As in, the more units you have under one roof, the more cost savings you achieve.

Tenants and Turnover
With a single family rental, you have 1 tenant at a time.  The minute they leave, your property is 100% vacant, costing you 100% of the mortgage while the house sits vacant.
With a 100 unit multifamily property, you have 100 tenants.  But the minute 1 tenant leaves, your property is only 1% vacant.  You can still easily pay the mortgage with the other 99 tenants’ rents that month.

Management and Maintenance
With a single family rental, professional property management will generally cost you 8-12% of monthly rents collected.
With a larger multifamily property, management can be as low as 4-6% of monthly rents collected.

With a single family rental, every maintenance request will generally cost you a bit more, since management will have to send someone out to the property, who checks out what the issue is, then they head over to home depot to get the specific supplies, then back to the house to fix the issue.  This costs more time and more individualized/full priced expenses.

With a multifamily property, this all gets streamlined, as the property now has 100 units that are all exactly the same.  When there’s a maintenance issue, management radios the maintenance person, who walks over to the unit to assess the situation, walks back to the supply closet to pick the piece that has been purchased in bulk at a discount, then fixes the issue quickly, and for less money than a single family house.

This continues in basically every aspect…
Say you need a new roof.  With a single family rental, you pay full price for 1 roof, covering 1 door.
With a multifamily property, 1 roof covers many doors, not just 1.
Landscaping? A single family rental has 1 lawn for 1 door, but that same 1 lawn can cover an entire multifamily property.
Need to repave the driveway? 1 driveway for 1 house, vs 1 driveway for 100 tenants entering the property.
Need to paint the exterior of the building? Of course, a multifamily property is a larger job, but again, you get significantly more bang for your buck as the painter paints 1 exterior wall that covers many units of that building vs just the 1 unit of a single family rental

I think you get the point.  Economies of scale work heavily in your favor as you invest in larger multifamily properties.

When you invest passively in large multifamily deals, you don’t have to worry much about your tenants, turnover or any maintenance issues, but you do get to enjoy the benefits of being invested in a  large property that is running more efficiently due to economies of scale, which ultimately puts more stable returns into your pocket.

Next week…Part 4: SELLING YOUR PROPERTY – How properties are valued.

Investment Update 4/20/18 – We Closed On The Lila @ Oakgate!

253 Units in San Antonio, TX

I am very excited to announce that Amity Cash Flow, in partnership with Wildhorn Capital, has closed on The Lila @ Oakgate (formerly known as Woodbridge Apartments) in San Antonio, TX.  We have big plans for this property and can’t wait to get to work!

Our investors are elated with the level of returns in the booming market of San Antonio, TX.

The property will be repositioned over the next 12-18 months, increasing the NOI and driving up the value. The process will begin immediately with vacant units being renovated and rents increased.

To find out how to get involved with our next deal shoot me an email at chris@amitycashflow.com.

Just Got Back…

Just completed 3 days of training. Here’s what I learned.

Hi Everyone!

I just got back from 3 days of multifamily training at Rod Khleif’s Multifamily Bootcamp.  It was great to be able to meet so many of my peers in the investing space and I wanted to share some of my takeaways with all of you.  Don’t worry, I won’t go into all the technical jargon about agency debt, cap rates, NOI, market research, SEC regulations, or any of the other countless acronyms.  🙂

Single-Family vs Multifamily Part 2: Costs required to buy a property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

Last week we talked about the time it takes to buy a property, but what kind of costs are associated with a purchase?  (This article will not address the costs associated with ‘owning and maintaining’ a building, that will be a later post.).  You’ll find it encouraging that regardless of which property type you buy, there are really only 2 items you will pay out of pocket: Down Payment and Closing Costs.

For this comparison, let’s assume we’re going to buy either 5 Single Family Rentals or one 10-unit apartment building.

For easy numbers, we’ll say that the 5 houses each cost $100,000, and that the 10 unit building costs $500,000.  So the total value will be equal.

DOWN PAYMENT:
This is simply the amount that the lender wants to see you invest into the deal for them to feel safe lending you the rest.  This is your money and is invested into the property. You would get it back if you sold the property at some point.

For the 5 SFRs, you will generally put down 20% on each.  The bank will lend the other 80% of the purchase price.
20% of $100,000 = $20,000
$20,000 x 5 houses = $100,000 total down payment.

For the 10-unit apartment building, you will generally put down 25-30%. The bank will lend the other 70-75%.
30% of $500,000 = $150,000 total down payment.

If you don’t have a large chunk of money to use as a down payment, then perhaps Single Family is a good option for you to start with.  But remember, whichever property type you buy, this is your money that is invested in the property and will come back to you if you sell the property.

CLOSING COSTS:
This is a broad term that can include all inspections, document filing fees, appraisal fees, etc.  These are fees – money you will not recoup upon sale. 

For the 5 houses, you will pay closing costs on each property of approx $4,500.
$4,500 x 5 = $20,500 total closing costs.

For the 10-unit apartment building, you will pay closing costs of approx 2% depending on your lender.
2% x $500,000 = $10,000 total closing costs.

This is an area I see the huge benefit of multifamily properties.  You get more bang for your buck since you are only paying 1 set of closing costs, instead of 5.  Remember, these are fees, money you will not get back when you sell the property (unlike the down payment, which will come back to you).

And that’s it.  These are generally the only costs associated with buying a property.

As you can see, combining the 2 costs, you will need less money upfront to purchase a Single Family Rental.  Now, there are huge benefits to owning and maintaining a large multifamily property, but we’ll get into that next week.

If you are interested in investing in large multifamily properties but don’t have the capital needed for the down payment and closing costs, consider investing in an apartment syndication.  As a passive investor, you don’t have to cover allthese costs since they’re split amongst the investors.  As an added benefit, all these calculations, as well as all negotiations with the lenders, are handled for you.  You get to ride on the coattails of experienced investors who have preexisting relationships with the lenders and get great lending terms that fit that property and the plan in place.  But I always think it’s good to know what’s going on in the background as much as possible.

OK!  You’ve bought a property, but now you have to run it like a well-oiled machine!  We’ll dive into that in the next article.

Next week…Part 3: OWNING A PROPERTY

Single-Family vs Multifamily Part 1: Time required to buy a property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

It takes a lot of time and effort to buy a property.  You have to analyze markets, crunch numbers, profile tenants, find a property management team, pick a lender and get qualified…

But here’s the thing… all that work will be roughly the same whether you buy 1 or 50 units!  So if you want more units, this is one area where multifamily really shines.

Some examples to put this in perspective:

You may look for different highlights in a market for a single family rental vs a multifamily property, but you’re still ‘analyzing a market.’
(What are the schools in the area? What are the major employers? What are the crime statistics? What kind of stores are around? Walmart or Nordstrom? Starbucks or 7-11? Etc.)

You may crunch larger numbers for a multifamily property, but the amount of numbers/expenses are relatively the same regardless of your property size.
(Rent from a house may be $1,500/month.  Rent from all your apartment tenants may add up to $15,000/month.  It’s still ‘rent,’ just more zeros.  Insurance on a house may be $500/year.  Insurance on an apartment complex may be $5,000/year.  It’s still ‘insurance,’ just more zeros.)

You will still profile your tenant base regardless if you’re buying a SFR or a multifamily property.
(Who lives in the area? What is the median income level? Education level? Etc.)

You will have to talk to a lender and qualify for a loan, just a different department at the bank depending on your property size.
(A house requires a residential mortgage, whereas a multifamily property requires a commercial mortgage.  A local bank, for instance, can offer both types of financing, you simply talk to a different person at the bank and submit different paperwork – though commercial mortgages are more paperwork and require a more advanced applicant.)

You will need to find a property manager, but will simply call on different managers who focus on different property sizes.
(Some property managers focus on houses and others focus on multifamily properties.  You may ask them different questions and look for different answers, but you’re still having the conversation.)

You see, the time you’ll spend to acquire either type of property is roughly the same.  It may feel more overwhelming to buy larger properties, but that is simply a mind-shift.

Now, if you invest passively in syndicated apartment deals, all this time and research is done for you while you get to enjoy the benefits of having a much larger property with multiple tenants paying your monthly rent.  But I will always encourage you to learn as much as possible, even when investing passively.  

Next week…Part 2: COSTS REQUIRED TO BUY A PROPERTY.

The Power Of Leverage

Some of you have asked “Why do you take out a loan to buy a property?
Why not just save up enough and pay cash? You’ll have no mortgage payment, doesn’t that make you more money?”

Great question!

Real estate differs from stocks in that $100,000 can buy only $100,000 worth of stocks.  That same $100,000 on a typical real estate purchase with a 25% down payment, can purchase $400,000 worth of property!  ($400,000 x .25 = $100,000).  This is called ‘leverage’ or ‘borrowing money from the bank.’

But what we care about is the returns, right?.  At the end of the day, do we get more money in our pocket if we pay cash for a property? Or if we use leverage to buy a property.

Let’s look at the different scenarios, and calculate our cash on cash returns.

1. You pay CASH.
You buy a property for $100,000 that has a yearly net income of $10,000 before taxes.
Remember, since you paid cash, you have no mortgage.
Let’s calculate your cash on cash return in this scenario…
$10,000 (net income) ÷ $100,000 (total capital invested) = 10% cash on cash return.  Not too shabby!

2. You use the power of LEVERAGE.
You buy that same $100,000 property with only 25% down ($25,000).
Your yearly net income is still $10,000 before taxes.
But since you have a mortgage, you will have to subtract $5,000 of mortgage payments from your profit (this, of course, will vary depending on your loan terms).
$10,000 – $5,000 = $5,000 net income.
Remember, you only put down $25,000.  So let’s calculate your cash on cash return in this scenario…
$5,000 (net income) ÷ $25,000 (total capital invested) = 20% cash on cash return.

By using leverage, you have doubled your cash on cash returns for this property.  Oh, and by the way, you still have $75,000 from your original $100,000 to go buy 3 other properties just like this!

Note: The numbers used here are for example only.  I used nice round numbers to make it easy to digest.  Every real estate deal is different, but simply put, the numbers are in your favor when leveraging the bank’s money to buy rental property.