In this conversation with Jay Boyle, we found out more about his first 36-unit multifamily deal he closed recently. He'll talk about how he found it, how he raised the money, his business plan, and how he overcame several challenges. You'll also learn about what he's doing next (and it's much bigger than a 36-unit!).
If you haven't listened to the first part yet, do that now.
Click here to listen to Episode # 25 now.
Jay is so down to earth, and he's easy to learn from. Just a warning though: his experience echoes mine and others: you can change your life with multifamily building investing – YES, many have. But it's a long, arduous road in the beginning. Jay worked at his business 20 hours per week for 2 years before he was ready to do this deal. All of that PLUS a full-time job.
If he can do it, so can you.
Connect with Jay
To connect with Jay, send him an email at jayboyle at dawsoncreek dot biz.
What did you before this 36-unit multifamily deal?
I wanted to look in my own area in NJ, but deals were overpriced, taxes were high. I started with Loopnet. But I couldn't find a way to make them work. I used the SDA and looked at dozens of properties in my area.
I grew up in AZ and started looking there. It's really important to speak with brokers. Many deals are off-market deals, brokers give their best buyers the first crack at them. I called brokers every week and told them what I'm looking for. It made more sense to look at larger deals because I can get non-recourse loans and they're actually easier to get. Eventually the brokers would call me about deals.
My family lives there and I like it there, so I switched totally to that market. It was clear to me that there were many more opportunities there, and the math was working a lot better there.
I found a 90-unit property that was off-market. It was in a small community and it was operating at a 10% cap rate, but riskier because smaller community. I submitted an LOI to purchase and I made a low offer and they accepted the offer. Before I even submitted the LOI I spoke with management companies. As an out of town owner it's important to have good management companies. And I asked them about this community. Having a management plan is really important. Once you have an offer accepted you want to be able to move quickly, so it's wise to have the management solved first.
My money-raising plan was to be able to sell this multifamily deal to investors after I got it under contract. I think it's hard to raise money when you don't have a deal in hand. I was willing to take the leap of faith. And it was pretty uncomfortable. But it's OK to be in a new place, on unsteady footing. Sometimes it's the only way you can move forward.
I got the LOI accepted, but the seller wasn't very keen on it, it took 4 weeks from LOI to contract. I was getting on the plane to do inspections, but I got word from the broker that he accepted a higher offer. I think he used my offer to get a higher one. But I learned a lot about working with brokers, making offers, etc.
What was your plan for raising the equity for this deal?
For the last couple of years I spoke with my family about multifamily investments. My brother had some property and was contemplating a 1031. He and I approached some other family members and got verbal commitments for about $250K, which was enough to buy a deal like this.
Tell us more about the deal
It's 36 units, C-class property, the present NOI was poor. 75% – 80% occupied, it was barely breaking even. The broker proposed a good management company. I interviewed them first because I realized that the management is HUGELY important. It can make and break the business plan. He had experience with turn-around properties. That gave me the confidence to move forward.
But it needed some renovations, about $500 per unit. It may require more before we're done.
After stabilization we'd be operating at a 10% cap, our NOI would be $90K on a purchase price $900K. The market cap rate is 8.5%. That's “forced appreciation”. In a year we'll be able to refinance out our $250K investment and we'll still be operating at a 9% cap and have no cash in the deal. So our ROI is infinity. Year 1 is 15% cash on cash return. Then we'll hold long term for cash flow to bring money into the floor.
What were some of the challenges?
I needed to sell my duplex, but it took 6 months to close because we needed to evict the tenant first.
It took 4 months to close the 36-unit. It takes a lot of patience to get these deals closed. We had a lot of financing hickups. We had down payment cash. I have very good credit and still had trouble getting the financing. The banks didn't like the trailing 24 months. So we had to go 4 different banks. Eventually I had to go to a hard-money lender for short-term loan up to 18 months for 2% and 10%.
I did have to finance it with 30%.The main reason was because it wasn't a stabilized property.
How's it going now?
My new property manager is doing great. We only have 1 vacancy and he expects to fill that shortly. That gave me a lot of confidence.
What's next for you?
There are a lot of C-Class properties in this area that aren't doing well. We're interested in buying more property in this area. Our property manager has a way of combining social services to get higher rents, and that's opening opportunities for us and is allowing us to pay competitive prices.
Now we've demonstrated that we can close.
The PM and the broker sat down to identify other properties that would work well. He then found a portfolio on 164 units, and we're now under contract. We had enough for the deposit, so we did that and our plan for that is to syndicate that deal with people outside the family. And that opens a whole new area for me. So the information on your web site was really important to me. I have an outstanding SEC attorney who's working on the PPM. He's been a great mentor also. But that costs about $12K. But I'm learning a ton about the process.
Our ProForma projects 12% cash on cash for the investors and 20% on the IRR.
You're looking for a 164-unit multifamily portfolio, one of the big challenges was that you needed a co-sponsor, can you talk about that?
I needed a good syndicator co-sponsor, that's why I reached out to you at the time, so I called around a lot for a co-sponsor. I spoke with 4-5 experienced syndicators, they weren't particularly interested, but I persevered. Eventually I found someone in my market, and he's the co-sponsor. He has the net worth and liquidity to sign on the loan.
How did you convince the co-sponsor?
It's not just their net worth and liquidity, but also experience and network. I had this deal under contract, and I analyzed carefully. I knew it would be a good syndication deal. So I offered him the management fee 75% for investors, 25% for us, and we're sharing the management portion, I'm taking 1/3 of it and he's taking 2/3 of it. I told him I would raise all of the funds, but he also has the experience if necessary. I have the money for closing. I was going to do all of the work. I told him I want to learn the work in exchange for your support and mentorship.
And in a few years I'll have the credentials so I may not need a co-sponsor. And without him I can't do the deal at all. And 8% of the deal is a ton for me. Plus, the education is completely priceless.
Who's raising the money?
I am. But I needed and wanted the co-sponsor to make everyone feel good.
What's your # 1 Advice to Newbies who want to do their first multifamily deal?
Find your market
Spend time to educate yourself
Reach out and build a team of professionals.
Don't be afraid to be uncomfortable.
What kind of multifamily deals are you looking for now?
I'm seeking equity partners for this Tucson AZ deal, 10-14% cash on cash and 20% IRR. With a refinance at 1-2 years or a sale in 3-5 years, or JV partners. The structure is pretty much like you have it SDA. My sponsor likes to get 2% acquisition fee and 2% asset mgmt fee. If investors want to learn, I'd be happy to do a JV partnership, and let them in into the niche, introduce them to the broker and property manager.
We're in the financial due diligence is end of January and closing date is end of February. The broker keeps negotiating extensions. My goal is to have the $2.2M raised in December but I'm going to continue marketing.