Invest With MeGetting into the apartment investing business is no easy task. I took a lot of risks and got way outside of my comfort zone to make it happen. This blog is going to tell you the whole story of how my business partners and I combined forces to buy my very first multifamily apartment investment, a 32-unit apartment in Greenwood, IN, and how we fixed it up and sold it for a 3X profit just over 2 years later. I’ll cover the good, bad, and the ugly.
In this article, I’ll cover:
- Why we chose this market
- Why we chose this property
- The business plan
- How we came up with the money to purchase it
- Challenges we faced and lessons learned
- Selling the property
- Takeaways for you
- Why We Chose an Apartment in Greenwood, IN
My partners and I were on the hunt for a commercial multifamily property in the $1M-$2M range, but the high prices in Southern California made it impossible to find a suitable property within our budget. So, we searched for cities in the Midwest that met our criteria for good schools, low crime, a healthy economy, and affordable costs per unit. After researching various options, we found Greenwood, IN to be an ideal location for investment.
Greenwood is located just 20 minutes south of Indianapolis, providing easy access to a thriving job market and reasonably priced housing. Compared to San Diego, where the average cost per multifamily unit is approximately $340,000, Greenwood offers a more affordable alternative, with an average cost per unit of around $80,000. This means that for the same budget, investors can purchase 25 or more units in Greenwood, as opposed to just 5 units or less in San Diego.
With a median household income of $65,000, Greenwood surpasses the average income of most Midwestern areas. Despite the higher income levels, the average rent in the area is only $800 per month. Applying the 3 times the monthly rent rule to the median income and rent figures, it’s evident that tenants can afford up to $1,805 in monthly rent. This indicates that there is significant potential for rent growth, as the current rental rates are below the level that the median income can support.
Greenwood’s primary industries include healthcare, finance and insurance, and construction, providing stable employment for the local tenant base. Moreover, the city’s education system has been rated 8/10 by greatschools.org, and the growing demand for housing has resulted in a higher population of renters and an increase in rental rates.
Taking all of these factors into account, we decided to focus on Greenwood and networked with local brokers to gain access to apartment sales opportunities.
The Property
After extensive searching, we came across a 1968 vintage 32-unit apartment that appeared to be a promising investment opportunity. The property was listed for $1.1M, which was well within our price range. There were some good and bad things about the property.
The Good:
The property’s rents were well below market. Rent for one-bedrooms averaged around $600 and around $800 for the 2 bedrooms, whereas the market rents for competitors averaged $200+ more than that.
Multiple areas inside and out to add value
Prime location
The Bad:
The previous owner was a slum lord and didn’t care for the property
Poor financial reporting by the previous owner, so deducing what the current expenses were was difficult
It needed costly repairs that wouldn’t increase the value much, such as outdated electrical panels and plumbing issues
The Business Plan
We developed a well-thought-out business plan to improve the curb appeal, remodel the units, and improve operations, increasing the bottom line and making the property more valuable. Here’s a breakdown of everything we decided to implement into our plan:
- Hire new property management to improve operations and correct maintenance issues quickly
- Unit renovations: new cabinets, countertops, appliances, LVP flooring, efficient toilets, sinks, light fixtures, and paint throughout.
- All new sliding glass patio doors
- All new entry doors and unit numbers
- All new windows (96 in total)
- Converting the dilapidated office into a livable unit, making the total 33 units
- Renaming the property and installing new signage
- New fascia, soffit, and gutters
- Reseal and stripe the parking lot
- New mailboxes
- Install landscaping around entire property
- Install parking lot lighting
- Renovate the laundry facility and install new machines
- Purchase water heaters that were being rented from a vendor, decreasing costs over the long term
- Implementing Ratio Utility Billing System (RUBS) to recoup utility costs from residents
- Paint common hallways
- Resead and develop the grass lawns
We anticipated it taking 3 years to complete the renovations and refinancing to hold the property or selling for a profit.
How we came up with the money
In order to purchase the property and fund the necessary renovations, we required over $600,000 with a 20% down payment. To secure the funds, my business partners and I made the bold decision to liquidate our 401ks and most of our savings, but it still wasn’t enough as we fell short by a few hundred thousand dollars.
To overcome this shortfall, we presented the deal to three other real estate investors we had met through work and our local real estate meetup. They were interested in the project and decided to invest in exchange for a percentage of the profits.
Challenges we faced and lessons learned
This property was so old and unkept that we constantly had unexpected expenses arise. This blog would be too lenfthy for me to share all of them, but here are some of the biggest challenges we face:
Clay Piping Collapse
We experienced recurring sewer backups in a section of the building, and despite multiple visits from plumbers, the issue persisted. After paying to have the sewer lines inspected with a camera, we discovered that a large section of old clay piping had collapsed, obstructing the flow of debris and causing the backups. We could have avoided this costly issue if we had paid for a sewer line inspection during due diligence. Unfortunately, we had to use funds set aside for unit renovations to cover the $15,000 repair bill. This experience taught us to always inspect sewer lines with a camera during due diligence to identify any root or debris buildup, or potential pipe collapse.
Bad General Contractor
We hired a general contractor to construct new unit patios and second-story decks, but unfortunately, their workmanship was subpar, and they had cut corners during the construction process. Being unfamiliar with construction work, I was unaware of these issues until my father, who has vast experience in construction, visited the job site and identified numerous problems. After confronting the general contractor about the issues, we fought to have them corrected, but the entire ordeal resulted in a three-month delay to the project.
This experience taught me the significance of maintaining quality control when working on renovations that were beyond my area of expertise. Now, I always hire an inspector to scrutinize the contractor’s work and ensure that everything is up to standard.
Insufficiently capitalized
During our ownership of the property, we encountered numerous unexpected expenses, such as corroded cast iron drain piping in the laundry room, frequent HVAC failures, unexpected renovation delays, and non-paying tenants.
As we approached the end of our budget, we found ourselves needing an additional $200,000 to complete the planned renovations and refill our reserves. We were able to secure the funds from a private lender at a 6% interest rate, with interest-only payments. This loan proved to be a lifesaver, helping us overcome the shortfall and reach the finish line, but it taught me a valuable lesson.
This experience taught me the importance of thorough due diligence to have a better understanding of a property’s repair needs. Furthermore, it motivated me to seek out an experienced mentor to guide me through future projects and help me avoid costly mistakes and budget overruns. Now, my due diligence checklit includes every possible component of a property.
Following this deal, I found a mentor with 20 years of experience and over 8,000 apartment units under their belt. This mentor not only partnered with me on two subsequent projects, but continues to provide valuable guidance and advice to this day.
Selling the deal
Just two years into our business plan, we had already exceeded our pro forma value by a considerable margin. While we had initially anticipated rent increases of $100 per unit following the renovations, we were actually achieving rent increases averaging over $200. This unexpected success led to the property’s value nearly tripling in a very short time frame.
With ambitions of growing our business and pursuing larger deals, we decided to sell the property. After listing it with a local broker for $3.3M, we received multiple offers within a few weeks, and ultimately agreed to sell for $3.1M.
Despite facing numerous challenges, financial constraints, and mistakes along the way, we were able to triple our initial investment in just 14 months. This was a significant achievement that was not only profitable, but it established my track record, helped me score a mentor, and taught me more lessons than any amount of books and studying could have.
Here are three key takeaways that I recommend for anyone looking to secure their first real estate deal:
Embrace risk-taking. To achieve success in real estate investment, taking calculated risks is crucial. While it may require using your life savings, as Denzel Washington once said, “nothing in life is worthwhile unless you take risks.”
Find a mentor. The most effective way to avoid mistakes is to learn from someone with more experience than you. This could be either a paid mentor or someone with whom you can exchange knowledge and advice. There are many ways to find a mentor, so take the necessary steps to find one.
Always have contingency capital. It’s essential to keep in mind that things may not always go as planned in real estate investment. Therefore, you should set aside an additional 20% of the total project cost as contingency capital to cover unforeseen expenses. As Mike Tyson once said, “everyone’s got a plan until they get punched in the face.” Be prepared for any unforeseen circumstances and protect yourself by having a contingency fund.
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