I checked out numerous condos, townhouses and single family houses. As I learned about the industry, inquired about the successes of fellow neighbors, confidence gradually went up.
We placed bids on a few properties, got outbid, and felt dejected, but we continued. With a full-time job and other moonlight projects, I could not gather all the information personally to take the first leap. In those days, numerous abandoned properties were on the market; one just needed the heart to buy them in their rundown states. My agent patiently guided me like a big brother.
I took a chance on two townhouses for about $50K each in cash payment. One townhouse had a leaky roof, and the other seemed to have everything wrong from the foundation to the roof. It took me about 6 months to get both compliant with city codes, to find a tenant and start collecting rents.
I learned city codes, found contractors, renovated apartments, allocated budgets, negotiated, and performed multiple rounds of repairs until the units stabilized. It seemed like a never-ending process with constant doubt about whether the investments were worthwhile. Tenant selection, complaints, damages, and customer service were all part of a painful learning curve.
As the first two units stabilized, I accumulated the courage to bid for and buy a foreclosed condo, which took its own effort to stabilize and convert to a profit making unit.
While the second investment was just one small unit in an 8-unit multi-family building, in hindsight, it set me up to manage large future buildings. I learned how the association managed the building, its rules, and its regulations. It gradually dawned on me how the industry is supported by financial institutions, insurance, cities, brokers, and the federal government in general.
Need for scale was the next lesson learned as we struggled to maintain one unit per city. So we started looking for multi-family buildings in distressed state and foreclosure prices. We picked up a six unit building using one of the townhouses as collateral for almost zero down payment.
The six-unit building was available at that time for $300K. The lender agreed to finance at 75% (LTV loan to value), allowing us to buy the property for 25% or 75K down payment. After the townhouses had stabilized, their values doubled from $50K to about $100K each. So, we mortgaged one townhouse at 75% LTV, used the 75K proceeds to buy the six unit building for no cash down at the time of the purchase. So, the initial 50K investment for the townhouse allowed us to own seven profitable units.
Applying the refinance formula of existing units, we bid and purchased three additional six unit buildings in other Chicago land area cities.
The common theme across all multi-family purchases was the previous owners’ mismanagement. We worked hard to clean the property and premises, renovate, bring in new tenants, comply with the city, and instill good governance overall. There was constant aggravation, but the hard work and patience paid off. We increased revenues, expenses went down, and cash flow increased.
As confidence increased, investment values doubled, and the leverage effect generated 5X returns, we started trading and refinancing the six unit buildings for larger twenty unit portfolios.
We found an 18-unit complex in the market for 1.2M, with the bank asking for just over 200K in downpayment. So we sold a six-unit building at about 470K, which we bought for 300K, in a 1031 exchange (i.e., no tax) to buy the 18-unit complex. With the original loan principal from the six-unit building loan reduced after multiple years, the cash downpayment to buy the 18 units was negligible.
Then we found another 20-unit portfolio for about the same price, did another 1031 exchange of another six-unit building, essentially doubling the number of units owned, and managed to about 66 within a few months.
We shared our success with acquaintances and invited them to participate in larger transactions. With two minority partners, we bought a 38 unit complex, using the refinancing proceeds of other six unit buildings that had appreciated significantly.
The 38-unit complex comprised 20 townhouses, four two-bedroom apartments, and 14 one-bedroom apartments. For many years, the previous manager struggled with rent collections, multiple vacancies, bad tenant selection, poor upkeep, leaks, open drains, and deferred maintenance, which left them in a vicious cycle.
We bought the property for 2.2 million, with about 700K downpayment, at which time the rent collections were about 25K monthly. After purchase, within 4 years, after a lot of hard work, pain, personal supervision, hands-on involvement, and uncertainty, we doubled the monthly rent collections, distributed 2.7 M to the investors, and retained ownership of the property. That is about 4x in cash distributions within 4 years. A bulk of the payouts are from a recent refinance, which is not taxable at the time of distribution.
As relationship with the part time maintenance crew gained strength, we bought more properties in farther locations and started socializing as a company.
We bought a 26-unit complex and converted an unused apartment address (historically used for storage) into a functional unit with new plumbing, electrical, drywalls, and appliances. It felt like new construction from the ground up. As the ground team started receiving regular work with such capital improvement projects, they bonded and made themselves available for emergencies.
The team, still informally part-time, covered geographically dispersed areas around Waukegan, Elgin, and Aurora. With sound leadership and management principles, I recruited former US defense personnel and administrative staff working at larger companies as local property managers to augment ground-level maintenance resources and contractors. This experience allowed me to scale and not be physically present at the properties at all times.
Addison city provided a central location to coordinate our investments in the geographically dispersed Waukegan, Elgin and Aurora cities. So when we came across a distressed portfolio opportunity, we arranged the funds to buy it.
The Addison portfolio comprised six buildings, with 23 units in one and 12 units each in the others. Multiple units lacked management attention; twenty percent were non-paying tenants. The buildings also had numerous water supply line leaks, clogs, electrical, heat, parking lot, roofing, and rotting stairs/balconies.
At the time of purchase, the city required us to replace stairs and balconies in three buildings after two previous landlords struggled with funds, management / technical expertise, and their time availability to manage traffic while replacing stairs that were the only access to the apartments.
We took the risk and challenge at an underpriced 105K per unit. After about a year of possession, we have all 83 units under the city complaint state and have received certification for replacing the stairs and balcony of one building, with the other two in progress. All other above-referenced issues are addressed, including a contracted monthly rent roll of 125K+, consistently collected 115K+ over the past few months from about 70K collection from the prepurchase timeframe.
With this purchase, we ended up buying close to 100 units (between Addison and Aurora combined) in one year, doubling our portfolio yet again. The teams from Waukegan, Aurora and Addison are now able to move across locations as needs arise.
Before the purchase, we owned four buildings in Aurora. These 16 units were in buildings right next to our existing ones. The timing was such that the existing buildings were ready for refinancing. So, we used the proceeds from the refinance (tax-free) to buy the 16 units at no additional cash down payment from us.
These are electric heating units with two beds each, which generate better cash flow and have higher tenant retention.
Interest rates are high in addition to a political push for lower immigration. Inflation is going up. Rents are low, vacancies and eviction rates are higher. Older landlords may enter the market to sell.
Fund availability, team setup, robust mindset to take on risk, alignment of interest rates, and emerging opportunities to turn around property operations are the high-level factors that have helped us make our past investments successfully. When the times are tough, the strong get going. We continue to look for opportunities patiently. Stay engaged with us. When the time is right, we will contact you to see if you are ready!