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Lessons Learned: Full Cycle Transaction

One of the keys to ensuring investment returns is to focus on assets in markets with both job and population growth. Together, these two trends work to drive higher rents and property appreciation.


In early 2018, these trends created an amazing opportunity and eventual full cycle results. Here’s how.


We had been searching for San Antonio multifamily properties with a local operator for several months when we received a phone call just prior to the 2017 holidays. He started the conversation with “I’ve got a great deal” and over the next few days of analysis we were in full agreement.


The property was owned by a tired self-managing owner who was ready to sell. The owner’s self-management presented several opportunities to substantially improve cash flow and valuation. Having a strong conviction in San Antonio’s excellent job and population growth trends, plus having a deal that penciled well, we were able to make an offer with confidence. .


Why We Loved This Deal


With an average unit price tag of $60,000 in San Antonio, we were thrilled to negotiate a price per unit of $50,000 per door and the opportunity continued to get even better! During our inspection we realized the property had been significantly altered! It turns out, the original structure was built with 130 units and restoring the units to their original count required little cost or effort.


The $10,000 to close the opening between the units and reinstall the kitchens was nominal compared to the projected profit. Remember, our purchase was already $10,000 per unit less than market value. Once complete, each additional unit held a $60,000 market value. The 24 additional units would increase rental income as well as instantly add $1.44M in value resulting in a $1.2M profit.


Our business plan included:

  • Renovate interior units to attract better tenants

  • Raise rents to proven market levels

  • Re-brand the property under new ownership

  • Add 24 units for a total of 130 units

  • Decrease expenses by transferring utilities to tenants

  • Increase NOI (Net Operating Income) and property value


Execution


We successfully implemented our business plan in the first year. We continued to cash flow at a higher rate in year two and also continued to raise rents in line with growing market rents.


After two years we had increased the value of the property by 55%!


The results of our business plan spoke for itself and we received an irresistible unsolicited offer of $9.1M which was higher than our 5-year target price.

Ultimately, we purchased the property for $5,250,000 and sold it for $9,200,000. Suffice to say, we didn’t mind going full cycle early capture these returns.


Lessons Learned


Power of strong partnerships


Prior to this deal, I had always been a one-person show. I analyzed, purchased and operated properties on my own. Through this deal I realized the power of working with high caliber people. Partnerships have helped me to accelerate my learning and scale my business in a way that would have taken me years longer to do on my own.


In this case my operating partner brought experience in large multifamily turnarounds as well as local market knowledge. Our property manager also brought experience from all the assets she’s ever managed and poured everything she had into this project to make it a success. She also brought us a buyer.


This was a true win-win-win and an example of the abundance mindset at work. Something I unfortunately saw little of in my years in Corporate America.


Conservative Underwriting Pays


With our current teeter-totter economy, I hear many investment sponsors touting their “conservative underwriting”. Sadly, these are often the same investors outbidding me (AKA overpaying). Knowing I steer clear of aggressive assumptions in my business plans gives me confidence in the projected outcomes.


When the COVID pandemic hit there was lots of talk about asking lenders for forbearance. My partners and I never considered it because we knew our assets would cash flow even if occupancy levels dropped to historic lows. Legacy Apartments is just one of many examples of how a conservative approach allowed my team to under promise and over-deliver.


If you are a passive investor interested in learning how to conservatively assess an opportunity, go to my Mentorship Page and scroll down to view the “Winning at Passive Investing” outline and schedule a free strategy call.


Exiting Isn’t As Easy As It Seems


Taking a property full circle from purchase to sale is exciting! Unfortunately, a signed purchase and sale agreement doesn’t mean much if the buyer fails to perform. Legacy’s first buyer was under contract for 90 days before realizing they were unable to raise the down payment.


Amazingly, we had received 2 other offers while under contract. With a solid team in place, we closed seven months later and $100,000 above our initial contract price. This falls under the category of not counting your chickens before they hatch.


Putting Profits Back to Work


With returns that exceeded expectations, we wanted to put those gains right back to work. Fortunately, the timing worked out such that we had another investment opportunity within a month of the sale. This allowed us to put profits to work and created a massive tax savings as the “passive losses” on the new property would offset the capital gains on the sold property (consult your CPA as your tax situation may vary).


Despite the pandemic and stock market roller coaster, apartment investing continues to provide steady profits for us. By partnering with like minded operators, we can identify opportunities, execute on conservative plans, and that deliver consistent returns during the hold period and at sale.


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Steeve Breton often speaks at national real estate conferences and has been interviewed on numerous podcasts. He has invested in over 3,000 apartment units and has diverse real estate experience. His conservative approach and analytical skills enable him to clearly assess risk and invest wisely to maximize client returns while preserving their principal. About Steeve | Mentorships with Steeve