I’m going to jump into one of our case studies today because I want you to get an inside look at how I assess risk and work with my students. We’ve done over a thousand deals in the wholesale, rehab, and rental space with my company Freeland Ventures, and we currently have over 4,000 units in our portfolio.
This particular case study is located at 1835 Buhrer Avenue in Cleveland, Ohio if you want to look it up. This multifamily is inside the Tremont neighborhood, which is one of the hottest areas of Cleveland. I personally lived in this area back when it was gentrifying and you could pick up a property for $30K-$50K. Now they’re building homes down there that are worth $800,000, and it’s a popular neighborhood for professional athletes and sports owners.
The Borrower’s Proposal
One of our local students came to us with this deal, and he said “Hey, I’ve got a duplex under contract, and I’m going to renovate and rent it out.” He needed acquisition funding, so we funded him through a private lender loan. Between his purchase price and his rehab he borrowed $83,000 from us, and he got to work. Everything was going smoothly and on time, but then he suddenly stopped asking for draws from us.
We couldn’t figure out why he was slowing down. He was on track and doing a great job, plus the deal had a ton of equity in it. The property appraised at over $200K, so he would have $120K in profit if he sold it, or solid cash flow if he didn’t. So when I happened to be in the area looking at another property that I own, I went over to the duplex to see what was going on.
The place was locked up tight, and the neighbors told me that no one had been around for at least 60 days, so I called my student and asked him what was going on with the property. It turns out, he’d had a family emergency, and had decided to move to Toledo, which is 2 ½ hours away. And he just wanted out of the duplex to deal with his family problems.
I like to lend at 65-70% of the After Repair Value (ARV) for this exact reason. It didn’t take me very long to come to the snap decision that this was an amazing deal. We could get a new private lender loan on it, finish off the rehab, and simply do the deal ourselves. So that’s what we did.
We ended up getting a quitclaim deed from the borrower over to us, and I got a new private lender to give us a new loan for $130K. I didn’t need $130K, but the private investor was a friend of mine that’s been loaning to us forever, and I wanted to use as much of their capital as possible while also giving myself a little bit of a buffer.
By cleaning out the property and spending maybe $5,000, we could put the duplex back on the market and rent it out at $700/month per unit. But if we did a really nice job on the property, spend a little more money and really make these units shine, we could get $1200 a unit. Then we could increase our cash flow an extra $1,000/month.
Our budget for this property broke down like this:
- $7,000- New HVAC system
- $5,000- Interior, including paint, bathroom tile, LVP flooring, new blinds
- $7,000- New ductwork
- $4,000- Painted exterior & cleaned up the garage
- $6,000- Labor costs
For roughly $30,000, we were able to get the property into a place where we don’t have to worry about it for ten years. It’s in beautiful condition, and the neighbors are thrilled with the remodel too.
In the end, we were all into the property for $115K, plus we’ve got an extra $15K because we borrowed $130K from our private lender that we are going to pay 10% fixed return on their money. The plan is for us to refinance this into long-term debt. Once the property is totally occupied, we’ll be immediately cash-flowing from day one. A new bank loan for $130K at 5% interest and a 30 year ARM is only going to cost us $1100/month, while we’ll be collecting $2400/month in rent.
My take-aways from this crazy pivot from a loan gone bad to an amazing deal is this:
- If you’re going to be a private lender, you have to loan at 65-70% of the loan-to-value.
- If you’re a borrower, you’ve got to borrow at 65-70% loan-to-value.
- If you’re making loans, you need to underwrite the loans really well so that you have the chance to take back a loan like we did here.
- Don’t make a loan and become over-leveraged.
- Buy in the right neighborhoods. This is a Class A neighborhood where people want to live.
- Buy for cash flow.
I also need to take a minute and plug my software, Accelerated Investor Office. I was able to pull the rent comps, the rehab budget, and the for-sale comps quickly together to analyze this deal. I had the tools I needed to quickly make a decision whether I was going to pull the plug on this property or snatch it up for my own portfolio. Making $1300/month in cash flow on a duplex is a no-brainer to me.
I don’t love it when deals fall through, but I was really thrilled to turn this around into a great cash-flowing deal for us. This is a great neighborhood, a great property, and we were able to give a private lender a great return on his money. If you’ve got a property that would meet our criteria, we’d love to talk to you.
Listen to the full episode here.