What's going on YouTube. It's Matt Faircloth. So I'm here with my man,
Dave Mitro. Construction and asset manager for DeRosa. What's up brother? So Dave,
we're heading to Baltimore, man. Where are we going? What are we going to go look at?
We have a 110 unit property right outside Baltimore. We are in what's called the best
and final stage now. What's that mean?
Well, I think there are around 17, 18 people that put in bids. And now there are six or
seven remaining in what's called best and final. So this means sharpen your pencil, take another
trip down here, and come up with your final offer. Come with your best foot forward now.
Right. Because guys buying an apartment building is such a fun process. You typically have to
do it twice. Analyze the deal, look over the numbers, walk the site, come up with
your absolute best price that you can do to get the deal. And the seller says, "That's awesome.
We're going to take the top 25% creme of the creme de la creme and get them to bid again."
Trying to squeeze more money out of the buyers. And that's pretty much what this is all about.
But hey, these are the rules so we got to play the game. So we have made best and final. We're
down here to go look at this property and we're going to go and do a site walk. Dave, what are
some things that you're going to be looking at while you're walking this site? To determine if
we can increase our bid, or if it's a deal that we wont to do. What are some things that you're going
to be looking at? Because Dave will be managing this asset as a DeRosa team asset manager,
if we do win the bid. So Dave, what are you going to be looking for while we're here?
So like we said, this is when you just sharpen up your pencil. So we have a number in mind right
now to spend on our cap exs, our renovations, both interior, exterior. So now it's the time where we
want to go in and get that number as accurate and precise as possible because that can make
all the difference in the max that we can offer for this property. Do we eventually get it,
or do we lose the deal because of it? So we want to go through as many units as they'll let us
and really sharpen the pencil and see. What do we want to do on this unit? Do we want to put
in new flooring? Do we want to add a washer and dryer? Does it make sense to do that?
New appliances? So that's what I really want to focus on today and see what we come up with.
So this is how you sharpen up your pencil on a multi-family deal when you need to, guys. You
are looking at what are the capital improvements I need to make to increase the revenue on the
property? So if I put a washer dryer hookup in, what's that going to cost me and how much more
money can I make? The second question, you're going to learn by looking at other competitive
properties in the market. The first question, what's it going to cost me? Well, you should have
some industry experience on this. We believe installing a washer dryer hookup in a unit,
including plumbing, venting it outside, all of that should run somewhere between $1500 to $2000.
I need to see it because I didn't know if the place I want to put that washer dryer is going
to be on an exterior wall because that's going to be a big factor for me to determine on cost.
So those are the things we're going to look at is the capital improvements you want to make versus
the return that you're going to get. You guys got to look for some deferred maintenance. Hopefully
there's not a ton of here, but you're going to look for things the seller didn't do and things
that we're going to have to do to tighten up, to button up. One thing that we want to do is the
current leasing office is in an apartment. That's very common in multi-families. So Dave, where are
we moving that... We got to have a leasing office, what are we going to do with it?
So there's a big area on the property that is being used as a
fitness center right now. We think it would be better utilized as a leasing office. And then
with the current leasing office, we renovate that into a unit and we increase revenue.
And truth be told, tenants need fitness. It's valued. People want to work out,
but this fitness center is really small. It's got like two treadmills and a NordicTrack. It's
clear nobody's using it. So although tenants want fitness and want health and everything like that,
and we want them to have that too, if they're not going to use an amenity and if it was a halfway
done amenity and a crummy amenity to begin with, might as well take it out and give them something
that's useful. Which is a better leasing office to meet with their leasing staff and everything
like that. So bottom line guys, when you're in circumstances like this, when you're sharpening
up your pencil on a multi-family bid, you really want to look at is every nickel that
I'm going to spend in this property worth it? Last thing that I'm going to be looking at very
closely, we're meeting with our underwriter here at the property. He's meeting us at the site. What
can I do to keep expenses down? Right, Dave? What can I do to keep expenses down on the property?
Because if I can keep expenses down by reducing water consumption, reducing energy consumption,
reducing maintenance expenses by maybe making a one-time fix that I don't have to pay money to
maintain it on a regular basis. Doing all those things increases our profitability. Because
in today's market and to get into deals, putting your best foot forward is an understatement.
You got to put another foot behind your best foot to get it to be considered on deals like this.
So to do that, you really got to sharpen up the pencil while being honest with yourself and making
sure the deal still works at those numbers. So Dave, you pumped to go look at this property?
Yeah, let's do it. Yeah. So guys, listen, we're going to bring
you with us and show you guys some bids. And make sure you watch this to the end so you guys can see
our analysis after we walked it. And we'll tell you about the good, the bad, and the ugly.
First note to bring up is that, and we knew this before, but the broker was very animated that
the seller is doing a 1031 exchange, meaning they want to sell this property and they want to take
the proceeds, that they make here on this sale, they want to roll it into another property and
that. Now 1031 exchanges can be somewhat complex. There's a lot of stuff on DeRosa Group's YouTube
page about that. That you guys should totally check out if you want to hear more about 1031
exchanges. But in a nutshell, it is a way to sell a rental property, an investment property,
and keep the proceeds and roll it into another property without having to pay
income tax on that sale. So you can parlay and transfer up your rental property,
your sales proceeds into your next deal. It's a great way for tax leverage and tax
minimization, but there are a lot of parameters and there's a lot of timelines associated with
1031 exchanges, that you need to be wary of. And as a buyer of a property, when a seller's doing a
1031 we have to be very cognizant of that sellers timeline. And we probably have to be very flexible
with their timeline. Right, Dave? Absolutely.
Yeah. So at the end of the day, that was something we were very adamant about. That we had to be very
adamant that were going to work with the seller on their closing timeline. And I think that's
one thing that we try and do is be very amicable as buyers and make things friendly transactions,
not adversarial. That will be very open and friendly and work with the seller on their closing
timelines. So that was number one. That was our goal, to make sure we conveyed to the broker
that we would be very willing to accommodate their timeline, close when they want to close.
And they want a 30 day extension. As long as it doesn't affect us financially, then we're happy to
push closing back a bit to accommodate them. Which is maybe good for us because it gives us
more time to raise capital. It gives us more time to do due diligence, gives us more time
to get our ducks in a row and our management team in place to take over the property.
So we view that as a good thing. Next, we toured the units. They were big units.
Yeah. I think they were over a thousand square feet,
which is the largest in our portfolio so far. Yeah. Very, very big. Nice galley style kitchen.
But I will say, the units were nice, but they were dated. They were very dated. And the rents
were lower than... Their two other properties around the property that are charging a good bit
more rent than what this property was charging. So Dave, big open-floor plan, what did you see
that we can do to bring this property to the next level? On the inside of the units?
So that's a good question. So we're below the competition. So what we need to ask is, do we want
to compete with them or do we want to be slightly below? A more affordable option. So we can go in
and do everything in these units. New flooring, new cabinets, countertops, all that. But does it
make sense to spend $7,000 and compete with the properties across the street that are much nicer
with better amenities? Or do we come in and do a moderate renovation and slightly raised rents?
Yeah. Interesting conversation because, Dave pointed out, this property is 110 units, but
it's surrounded by much larger complexes that have tennis courts and pools and lots of playgrounds
and grilling areas. This complex is much smaller, doesn't have as much land, and it doesn't have a
lot of the amenity packages that those other complexes have. So the question bears, Dave,
Right? Do we want to try and do a direct run at those competitors? Or do we want to try and offer
an economy option to what they have? So nice amenities, but certainly a lower price point.
Right. So we figured out that these rents are so much below market that we can do a moderate
renovation, still raise them, and still be the least expensive. We came up with what's going to
be called a tenant-in-place renovation. So what we figured out was we can go in with the tenant
still living there and make some minor upgrades and changes. Switch out the appliances,
we can put in a low-flow toilet and aerator. Now that won't really help the tenant out,
but that helps us because we pay for water. Yeah, it boosts our NOI. And other competitors,
by the way, in the marketplace, tenants pay for water. Because we're paying for water,
we want to try and minimize that. And it's also just a good environmental move to make. To try and
minimize your water consumption on properties. It's just a good, responsible thing to do. And
it saves us money, and that. And we also get a cheaper interest rate on our mortgage if we do
a green initiative. So for all those reasons, it's good to do water conservation.
Right now, I think there's seven buildings. Seven or eight. And each building has a laundry room on
the first floor. Coin operated. Let's be honest, if you're a tenant, it's more desirable to have
that inside your unit. So we found an area next to the bathroom in the hallway to put in a washer
and dryer. And these are things that we feel we can do with the tenants still living there. Don't
have to wait for their lease to expire. Don't have to try and evict. We can go in day one,
implement this program, when the tenants lease comes up, we can give them this option to raise
rent for these additions. Or we can go in and give them the option day one.
Yeah. We're calling it a renovate-in-place. And we've done that at other complexes. And we've
only started doing that a few years ago because we made the mistake of needing a tenant to move
to do a unit upgrade. And the problem with that is, you create a vacancy. And the biggest expense
you have as a landlord is going to be vacancy. No, it's not going to be utility expenses. It's going
to be vacancy in your units. To avoid vacancy, wouldn't it be nice if your existing tenant base
would agree to pay you a few dollars more for a lot nicer unit? And I'm talking about
they leave for work in the morning and they come home and they've got new appliances,
new dishwasher and microwave above the stove, a new washer dryer in the closet,
maybe some other amenities. And we knock all this out in one to two business days. Right, Dave?
Right. And then let's talk dollars and cents. I know that all of you listening are probably
interested in that. So let's just put it out there. We believe for $4500 per unit,
we can do these upgrades with the tenants still living they're paying us rent, and then we can
increase the rent around $150 a month. And in addition to increasing the rent, as we said,
with the water savings for the aerators and the low-flow toilet, we'd also be reducing expenses.
We believe somewhere around 50%. So listen, the key to increasing NOI, it's not just raising rent
and revenue, it's also decreasing expenses. Which is what we're doing with this water expense.
Yeah. Expenses are the forgotten moneymaker on properties. It's more easy for people
to look at raising rents to increase property revenue, but it's actually more savvy and frugal
to achieve the same net operating income goal by just reducing expenses.
Yeah. Isn't it great to increase your NOI by not passing that along to the tenant? That burden of
raising their rent. We can increase NOI by just getting better at what we're doing.
There is a lot of mature, green, healthy landscaping on the outside. There wasn't a lot
of color. It didn't really pop at me. So I think that maybe a few bucks in landscaping upgrades.
Roofs are new, windows are new. So I think that all in, we've got a really great business plan
that has to do with the rocks that we want to overturn and do the things, and then things
we don't want to bother with. We don't want to create a lot of vacancy and go and throw a bunch
of tenants out and disrupt the complex because it seems to be running very well. So we want to try
and do this reno-in-place model that we've been successful with at other complexes, right?
Yeah. Let's talk about why. Well, if you're buying a property at 80%, 85% occupied, sure, that might
make sense. But this property I think is 96% with only a few vacant units. It doesn't make
sense to come in with a plan to renovate all 111 units. Even in a two to three year time period.
It just probably isn't feasible. You don't want to get into a situation where you're evicting
tenants simply to renovate. So that's why this tenant-in-place program made so much sense.
And the best part about that, guys, is if you try a reno-in-place program, you can do it at your
velocity. You are not subject to tenants moving out and that's not your construction plan. Your
construction plan can say, "Okay, I'm going to do 10 units a month." And you go to your tenants and
say, "Listen, I want to do 10 units. If you guys are willing to pay an extra whatever dollars,
$50, $100, $150, we'll give you all these renovation packages and all these upgrades."
Maybe you approach them with their lease renews. You don't have to, you can approach them when
their lease is current and you just draw up a new lease. And the prior lease gets canceled,
the new lease steps in. We're going to adjust our numbers and put our best foot forward.
And hopefully we win the deal. Bad news is they got 17 offers on this property.
Six of which made best in finals. So I think that the room is very crowded
with other competitors. Many of which are local. So I'm not sure if we're going to
get it, but I am confident that we're going to put our best foot forward.
Good trip, man. Wish us luck, guys. Watch us again next time. Take care. If you like this video,
we've got a ton more for you guys to learn on finding deals, renovating, and real-life
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