Just a week ago I closed on the refinance of my 48 unit apartment complex purchased just 18 months ago. Since I get a lot of questions from individuals asking what I look for in a multifamily property and what a good deal looks like I thought it would be helpful to provide a step-by-step description as to what the process looked like on this deal. Over this short period nearly $1.7 million in value was added to this property and I have gotten 100% of my original investment back in less than 2 years.
This deal came to me as a pocket listing from a regional commercial broker. I toured the asset, liked it and put in an offer. Unfortunately, it didn’t meet their expectations and they moved on. Fast forward 12 months and the deal went in and out of contract twice before coming back to me again. We landed on contract terms we could agree upon and closed the deal in August of 2021.
Upon closing the property with a purchase price of $2,610,000 the fully occupied rent roll was $29,167/month or $350,004/year.
The original loan on this asset was for $1,956,000 and a construction loan for $60,000. The term was 25 years at an interest rate of 4.00% with interest only payments for the first 18 months. During the I/O period payments were $6,700/month increasing to $10,609/month or $127,314/year.
To close I was required to come to the closing table with $680,000. These funds came from a 1031 exchange executed by selling a lower quality 26 unit and 8 unit property which I owned.
The value-add plan for this property was pretty simple. Replace all roofs to ensure longevity of the 1980s structures which were in very good shape for their years. Upon unit turning bring the units to market rate. For existing tenants bring their rent up gradually to market over a 3 to 4 year period.
Originally, I thought market rates were about $675 for a one bed and $850 for a two bed given the minimal market data in this smaller market. Upon purchase we quickly realized that market rates were closer to $750 and $950 respectively and now about $45 higher than that.
After 15 months of execution, I felt like I needed to make a decision on the asset.
Sell and capture all the equity growth. This would result in a large brokers commission, capital gains event (mostly averted with a 1031 exchange if possible), and having to find a new deal.
Hold to growth the NOI further and make assess again in 12 months.
Refinance the asset and get cash out of the deal.
Ultimately, I chose to stay in the deal refinance out cash. Reasons include the following.
This deal was performing very well and I see little risk in staying in it for the longer term. There are few major cap-x events forthcoming.
We had great tenants coming in and continue to add great tenants. This is a low stress low drama property to own which is easy for my team and easy for me.
With few deals on the market I didn’t see great opportunities to sell and transition the capital within my region.
The cash in a refi was sufficient to meet my needs for accomplishing a project allowing me to move my business into the new construction side of the business.
As of the closing of the refinance with Fannie Mae, brokered by Walker and Dunlop, in March of 2023 our current fully occupied rent roll sits at $39,695/month or $476,340/year. All things equal in the expenses our NOI (net operating income) increased by $126,336. The appraised value was $4,300,000, an increase of $1,690,000.
The new loan sits at $2,760,000. This loan has an interest rate of 5.22% and is fixed for 10 years and has interest only payments for the entire term of the loan. Payments will be $11,962/month and $143,550/year.
After closing costs and refinance fees the cash out proceeds received were just over $600,000. Accounting for the cash flow received over the past 18 months and the cash out refi proceeds I have received over $700,000 back on my original $680,000 investment.
Moving forward we expect to increase our NOI by another $60,000 annually over the coming 24 months. As of today, I am expecting this property to cashflow $120,000 per year increasing to $180,000 per year over the next two years.
The goal with this refinance was to accomplish a few things.
Take interest rate risk off the table. 2022 into 2023 has been a rollercoaster in the debt markets. As I look ahead in my family’s financial plan this asset will provide us the means to support our lifestyle regardless of the performance of the rest of our portfolio. With that said I wanted to avoid interest rate risk in 2026 when our original loan would have been due. Cashflow wise this move didn’t make a big difference when comparing the monthly payments on the original amortizing loan vs. the new interest only loan. Now I can sleep easy knowing we are locked in for the next decade on this particular property.
Pull cash to leverage equity. Getting over $600,000 in proceeds back allows for me to fund the next real estate project and keep working to multiply the equity that I have built over the years. I still have over $1,4000,000 in equity sitting in this property but am spreading out the $600k into new assets
For those interested in investing and the nitty gritty behind a deal hopefully this was helpful for you. As always please reach out to learn more about what we are doing at JFH Capital and the opportunities we have for passive investors.