I sat down with Dr. Kirk Campbell (Mila Penn Capital) and Jean Claude (Chazak Investments) last month to talk about their latest acquisition: A 75 unit apartment complex in Atlanta Georgia. The property was purchased at $7,750,000, but appraised at $9,425,000, providing over $1,600,000 in instant equity. How did they do it? In this edition of Savvy Investor, I’ll explain exactly how Campbell and Claude found, structured, and funded this fantastic deal, and how YOU can get involved with deals like this yourself.

Finding the Deal

Finding a deal that provides millions in instant equity is not easy, let alone to close on. It takes an entire team and community.

“Community is so important, and having an abundance mindset that the deal is out there, we just need to find it” says Campbell.

The community has been built over the past 7 years through Xsite Capital, an investment firm who not only has over 300 million dollars in current acquisitions, but also provides mentorship support and guidance to motivated investors. The community has created deal flow that everyone shares and talks about. Brokers send potential deals every day, multiple partners reviewing these deals, daily discussions, and constant learning keeps the ball moving and keeps everyone motivated. Eventually, after months of work, the 75 unit showed up on their desk.

Structuring the Deal

Properties of this size don’t magically cash flow when you buy them. What it takes is financial savvy to find what numbers work, and more importantly, which ones don’t.

When structuring a deal, stringent underwriting comes first:

• What is the maximum amount of debt the property can tolerate?

• What returns are we wanting?

• What potential issues might happen that could hurt cash flow?

• What is the exit strategy?

These are just a few of the questions that need to be answered before submitting a LOI (letter of intent) to purchase.

“We were looking for a needle in the haystack, to hit a double or a triple, not a risky home run investment” Says Campbell. “And this deal fit our criteria, and the numbers looked great”.

Claude, an expert in underwriting multifamily deals, had to estimate future taxes, make sure the cash flow could cover 30% more than the monthly mortgage (a DSCR of 1.3x), get insurance quotes, talked with CPAs to ensure the property could have a solid cost segregation study, and look at the property’s profit/loss statements.

All of these put together helps determine what the future value of the property could be if executed diligently.

The plan is to renovate 50% of the 75 units in the first 24 months, add exterior improvements such as fresh paint and a new playground, and then sell the property within 3-5 years to minimize pre-payment penalties. The strategy, as Claude puts it, “leaves meat on the bone” for the next purchaser. Because only 50% of the units will be renovated, it will both…

1. increase the value of the property and

2. attract potential buyers who will want to finish the other 50% renovation

Side note: The power of multifamily

Small improvements can create millions in equity.

Why renovate the units? Let’s say, as an example, an in-unit washer/dryer is added to all 75 units. Knowing that adding this amenity allows a $100 increase in rent, that provides $7500 a month in increased income, or $90,000 annually. But that’s not where the real value is. Sure the extra cash flow is great, but let’s look at what this really does. How much does this increase the value of the property by?

$90,000 annually / cap rate of 0.05 = $1,800,000

Adding an in-unit washer/dryer to 75 units increased the value of the property by 1.8 million dollars. So when you go to sell it or refinance, you have that much more equity. Improving the tenants' lives through amenities seriously increases the value of the asset. It’s a win-win.

Funding the Deal

After the deal is found, underwritten, and a letter of intent is submitted and accepted, it’s time to raise capital to purchase the property. Here is the breakdown:

Loan: covers 70% of the property cost. Mila Penn and Chazak settled on a 30 year amortized fixed-interest debt service coverage ratio (DSCR) loan with a 5 year balloon payment… What does this mean?

• 30 year amortized: Payments are made in monthly increments that would pay the loan off in exactly 30 years. For example, if you had a $120,000 loan that was “amortized” over 10 years, you would pay $1,000 per month for 120 months.

• DSCR: The type of loan that is approved based on how much cash flow a property produces. Typically for multifamily you want a 1.25x (1.0 would mean the cash flow covers 100% of the monthly mortgage payment, but not a dollar more). I’ve seen banks accept as low as 0.85x. Campbell and Claude underwrote for 1.3x, which boasts their careful consideration and diligence.

• Balloon Payment: The loan payments may be amortized over 30 years, but a bulk payment equal to the full loan amount is due in 5 years.

The 30 year fixed interest rate will only cover 70% of the loan, so how did they cover the other 30%?

Through Savvy investors like you.

Here is the expected returns:

• 20% ARR

• 2x equity multiple after 3-5 years (investors will double their money at the time of selling)

• 35% tax savings in year 1 (through cost segregation study)

• 100k investment will yield approximately 201k after 5 years

• Investors will receive a 7% dividend annually and will receive 70% of net profits when the property sells

The deal has closed, but that doesn’t mean you can’t get involved. Companies like Mila Penn, Chazak Investments, and anyone involved with the Xsite community are always looking for their next deal. Check them out on LinkedIn, and let me know if you have any questions.