Jack Petrick and I have been good friends with each other ever since we met through our kids’ soccer team. I’ve been one of Jack’s primary private lenders on a number of his buildings, and we’ve purchased multi-family units together as well. Jack was a firefighter who did real estate on the side. Like many firefighters, he was determined to stay until he got a pension, but he left when he realized that he could make more from the laundries in his apartment buildings than he could on his firefighter’s salary.
As business partners, Jack and I work well together. I raise the capital and Jack looks for properties. This property that we purchased about a year ago in Shaker Heights is Jack’s first big multi-family purchase. We raised $2.2 million for this off-market listing, and Jack’s been onsite making sure everything is running smoothly.
In the next 6-24 months, you’re going to start seeing more deals like these hit the market. People who bought properties at retail prices are going to start hurting when their apartments go empty or their tenants stop paying rent. We’ve pivoted away from private lending for the last year and built up our cash reserves so that we would be ready for the housing recession that we knew was coming.
This is why our approach is to find distressed properties and purchase them at a discount. When a recession hits, we can weather the storm because we can have a little bit of vacancy. Our margins are just better because we didn’t pay retail prices. That’s why we buy properties with deferred maintenance, terrible property managers, low occupancy, low rents, or absentee owners because those distressed properties are the best bang for your buck.
Find Off-Market Distressed Properties
This Cleveland Heights property that we just closed on was the first off-market property that Jack’s been able to close on, and it has opened the door to tons of other off-market properties. Purchasing a multi-family property is not like purchasing a residential property. Brokers don’t want to stick their necks out for you, so you have to prove to them that you have what it takes to close on this deal.
Jack says that you have to show that you have personal integrity. That means showing up, communicating well, responding to phone calls, and texts, and never leaving the brokers any doubt that you absolutely want this property. It was a big growth opportunity for him to purchase this property because it was six times larger than any deal he’d ever done before. All told, the purchase price was $9.2 million, and we raised $2.2 million together for it. Once we get it renovated, it should appraise $14 million for the refinance.
Increase Profitability In Business Operations
We aim to buy properties for 65 to 70 cents on the dollar. That way, we can withstand a 20%-30% vacancy rate before we’re upside down. We leave ourselves a huge cushion before the building ever becomes at risk. But remember, we’re also buying distressed properties so we have a lot of ways to make small improvements that will move the needle on our profitability almost immediately.
For example, in this Shaker Heights property, the old owner was only claiming around $5500 of the laundry money. We were able to do some adjusting, fix some things, bring the cost in line with today’s prices, and now we’re running close to $25,000. This little fix brings in an additional $300,000 without much effort on our parts.
Now we can go through the units and continue to make improvements that will affect our bottom line. Upgrades in the kitchens or bathrooms, doing our water conservation, getting rents bumped up to market prices, and other small improvements immediately improve the cash flow on the property.
Renovating a Distressed Multi-Family
While this property was incredibly clean, it was dated with a very 1990s white and gold vibe all over it. We had 164 units, and Jack’s been working on getting every unit painted and updated. The updates give us the opportunity to bump up the rents, but it can be difficult to get in and paint occupied units. COVID doesn’t make things easier since people are reluctant to open up their homes.
When Jack started planning the renovations, he was going to send in one crew to do all of the caulking, painting, countertops, flooring, and the rest of the work. But he quickly found that it was more efficient to create one crew that did one job, like painting. That crew could get in and out faster and more efficiently. Since we purchased the property nine months ago, Jack and his team have finished renovating about 94 units, which is exactly where we want to be at so that we’re prepared for the refinancing next year.
Our ideal leasing period is May, June, and July, and this building’s already in that sweet spot. As tenants start moving in or renewing their leases, we’ll start increasing the rents to raise them closer to where they should be. The increase in rent will be easier to handle because the tenants that stay will get a recently remodeled apartment in return, and the new tenants will be paying the same amount they’d pay at any other Class B building in the city.
When you purchase your first multi-family, remember that the goal is not to pay the retail price. By paying 50-70 cents on the dollar, you’re going to give yourself enough room to handle any unexpected expenses or economic downturns. Don’t neglect the business operations though. That’s your chance to move the needle toward greater cash flow for the next ten, twenty, or thirty years. The next 6-24 months is going to provide an unprecedented opportunity to purchase distressed properties at significant discounts. Are you ready?