This property was acquired in February 2023. We purchased it off-market from a broker who knew we owned another property in the area and could integrate our operations to cover both. The seller self-managed and had a maintenance person living in one of the units. Rents were extremely low, with a 38% vacancy (5 units). The property presented well during our inspection, and with a solid cost basis with a creative twist to the deal structure, we felt it was worth pursuing.
High-Level Business Plan Summary:
- In business you see poor operators often, real estate is no different. Goal with the property was to keep the good, get rid of the bad when it came to tenants and as we turned the units move to market rate.
- Our goal was to refinance the property after we stabilized it between year 2 and 3. Pulling out most our original capital, while maintaining strong cash flow for years to come.
Obstacles Encountered | Lessons Learned:
Hobby Vs. Business
- There is a saying we use often: “Treat something like a hobby, and it will pay you like a hobby. Treat something like a business, and it will pay you like a business.”
- Self-managed, long-term owners that treat a property like a hobby are generally great opportunities for a seasoned operator to do the basics and create value.
- That is exactly what we did: got rid of the bad, put in the good, renovated units, pushed market rates, etc.
- What we didn’t expect was that most tenants weren’t good, and most tenants weren’t paying. By the time it was all said and done, we turned over 17 of 18 units.
Not All Smaller Markets Are Created Equal:
We have had a ton of success in smaller Midwest markets. However, not all small markets are created equal. Connersville, Indiana, has some good qualities, but one thing that was lacking is a quality tenant pool. It took twice as much effort to find a good tenant compared to our other properties.
There is More than Meets the Eye:
- When walking a C+ property in a C+ market, you expect to see certain things with the condition of the property and tenant quality, particularly when you add in the fact it self-managed.
- As we turned units and peeled back the “onion” we found many things that were done “cheaply” or they took a “Band-Aid approach” to the fix the item. FTD prides itself on always trying to do things right, the first time.
- This led to increasing our renovation/turn budget by close to 100K (50% more than expected)
Why Did we Sell?
- We were close to being stabilized as far as income goes. We put an extra $100K into this property but knew two more roofs would need to be done.
- If we could gain a strong return and avoid putting any more capital into the deal, along with most likely selling our larger asset in the market, it made sense.
- Repurposing these returns into upcoming projects, creating velocity of capital.
Overall: Would We Do This Deal Again?
- Yes, very strong returns in a short amount of time. However, knowing the type of seller and the unknowns, we would have hired a third-party inspector. We would have used that inspection, along with our own experience, to build out a larger, more conservative CapEx and renovation budget.
Financial Results:
- Purchase Price (February 2023): $792,000 ($44,000 Per Unit)
- Sale Price (August 2024): $1,175,000 ($65,278 Per Unit)
- Hold Time: 18 months
- Invested Capital: $168,000
- Return of Capital & Cash: $334,000
- Equity Multiple: 1.99X
- Average Annualized Return: 58.11%
- IRR: 57.98%