022: 1000 X 2020 – Indy Property Update

SHOW NOTES FOR EPISODE #022 – 1000 X 2020* – INDY PROPERTY UPDATE

In this episode, Bill Manassero shares an 1000 X 2020* update on the 22-unit apartment he purchased in Indianapolis.  He outlines his “value add” strategy  and discusses how he hopes to increase the value of the property in one to two years.  He also shares how he leveraged three existing properties to purchase the apartment. *1000 X 2020 is Bill’s plan to acquire 1,000 units by the year 2020.

Overview

As you may or may not know, I purchased a 22-unit apartment in Indianapolis in May as part of my goal to own 1,000 units by the year 2020.  It was a big leap for me, going from 6 units to 22.

To purchase the apartment, I took a cash-out re-fi on three properties – a single family home in Atlanta, a duplex and another single family home, both in Memphis.  I initially paid cash for all three properties and had no mortgages.  Fortunately, all three properties had increased in value in less than 2 years and there was plenty of equity that allowed me to not only get the $90K plus down payment I needed for the apartment but I also had $60k extra for rehab expense.

Here Are Some Lessons Learned

It was difficult to get a great loan for the apartment:

• I was inexperienced with apartments this size so lenders saw that as a risk.  To offset that fact,  I submitted a compelling business plan that included my mentor as part of my management team.  He have extensive experience, however, he does not have an equity position in the deal.  I also include my local Indy attorney and property manager on the team.  The banks were still not willing to take a chance and I had to go to next tier financing — righ below “hard money.”
• The deal was also too low in price (I negotiated $350,000 for the property).  If the loan was $500K or higher I could havehave a better rate.  If it was $1 million or more, I could have got a great rate
• The rate for the re-fi loan also was not that great.
• Lesson learned: you literally pay for your inexperience!

My goal is to increase the value of the property within a year by doing a “value add” play:

This is the great thing about commercial properties as opposed to residential.  Whereas in residential financing they rely heavily on local “comps,” in commercial, you can control the value of the property by increasing it’s profitability.  Instead of relying on “comps,” as is done with residential real estate, the value of a commercial property is assessed by its ability to generate sustaining profit as an asset.  Appraisers look at:

• How is it as a business?
• How much profit is being generated?
• Is it a “good investment?”
• Is it sustainable?

My value-add play was simple:

• Upgrade the common areas
• Upgrade exterior and “curb appeal”
• Upgrade electrical
• Upgrade each unit
• Increase rents 12%
• Reduce the “owner out-of-pocket” expense by having tenants pay all or most of utility costs

This will allow me to increase income significantly.  And when income goes up, property value goes up.  In one year, I will have the property re-appraised and hopefully refi the property (it should be well over $500K which will get me more favorable rates, pay off the re-fi  loan and free up equity in the  three homes I used for the loan.

That’s it for today!

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