I am humbled that more than 3,700 (mostly) strangers care what this middle-aged Coloradan thinks about Real Estate! Thank you!

I am going to start a new series- #AOAD - Anatomy of a Deal.

Going forward, I will occasionally do a deep dive on one of our deals, complete with numbers and lessons learned. Eventually, I will do the 276 unit deal we bought in 2018 that really transformed our biz.

In 2014, we found this gem of a 4-plex near the University of Denver. My partner, Chris, and I bought it. It was the first multifamily deal that we ever did. We self-managed and did all of the renovations ourselves.

4 units: 2 2x1s, 2 1x1s. Yoc 1948

Bot 2014 for $465k ($116k/u)
Sold Dec ’17 for $715k ($179k/u)

Gross MOIC 3.4x
Gross IRR 46% (over 3.5 yrs)

Stabilized UYtC at Sale: 10% (not including our man hours in the cost denominator)

Property was in pretty rough shape as it had been owned by an absentee owner who had not spent a dime on it. The 1brs were renting for about $500 and the 2brs for about $750. Nobody complained about the condition because the rent was so low.

This was a stale deal, mis-marketed by a resi broker that had been on the market for 12+ months at $570k (lesson #1).

We came in super low on our offer (not really knowing what we were doing). Got to know the broker and discovered the seller was highly motivated to sell.

We borrowed 80% to close ($372k) on a 1-4 loan and each put in $45k to fund the closing and initial rehabs. The seller also gave us a $7k closing credit.

I *think* we each put in another $5k (lesson #2) to fund future renovations. So total equity was about $100k

We got to know each tenant well and tried to coax them into signing higher rents when their leases ended to no avail.

I ran “property management” - basically leasing and accounting and my partner ran maintenance and renovations.

After 3 months the first tenant moved out and we set about renovating the unit. Chris (who has been a remodeling contractor for 20+ years) ran the renovation and I did small tasks like painting and daily trips to Home Depot. Unit came out great.

We spent ~$7500 on materials and did all the work ourselves (probably 100 man hours) - Lesson #3. Bumped rent from $750 to $1100. A 56% “cap rate on rehab dollars”! (This was before I discovered UYtC). Over the next 6 months we renovated two more units …

… and rerented the 4th unit that was actually in decent condition. We took the rent roll from $2650/mo to ~$4000/mo, invested a ton of sweat equity, redeployed cash flow back into rehab and never put another dime of equity in the deal.

I remember one time we had a grad student moving in the next day and due to poor planning, the work was not 100% done yet. I ended up working in the unit most of the night and sleeping on a blow up bed!!

During year 3, we took our 100% higher NOI to the bank and asked them for a refi. For a small orig/uw fee ($10k), they gave us back $60k of our initial equity. So, now we have $40k of equity left in the building and we are cash flowing around $800/mo (24% CoC).

Lessons learned

1 - find deals that have a chance to be mispriced (resi broker selling a MF deal, stale deal that seller mispriced, “off market deal” that you self-source)

2 - get good accounting systems in place early. As I reviewed our files for this deal, I was dismayed.

3 - when you are first starting out, DO EVERYTHING. Later on in your career when you are working with vendors, property managers, leasing agents, etc., you will be a better manager for having done it all yourself.

4 - match your financing to your business plan. In 2016, we wasted $5-$10k on a refi. If we planned ahead and knew we were going to sell 12 months later, we wouldn’t have done the refi.

4 (cont’d) - While your business plan may change over time, it is imperative to match your equity capital with your debt capital with your business plan. Before you snag that low rate YM prepay, make sure you won’t pay off early. Big prepays can be excruciatingly painful.