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Real Estate Investing School Podcast
196. REAL DEAL: The Art of No Money Down Apartment Investing
00:19:05
Welcome to the Real Estate Investing School Podcast! In this Real Deal episode Brody Fausett sits down with a friend and incredible real estate investor, Michael Fitzgerald. Michael shares a deal where he bought entire apartment buildings with $0 out...
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- [00:00]
A
What's up, everybody? Welcome back to another Real Deal episode. I love these short, sweet, to the Point episodes. Today we have an awesome guest for you guys. His name is Michael Fitzgerald and he is from North Carolina. Michael is the man. We actually, we got connected through a mutual friend and then later met in person. And he's even better in person. So you guys, you guys get a. Get to hear from him on an awesome deal that he's done. This is going to be fun because it's a unique multifamily deal and it was the one of the first multifamily deals he's done. And what's also unique about it is it's one of the first ones he's done. We didn't have to use any of his own money. So we love getting creative. We love strategizing on like, hey, how can I go find these bigger deals? I know a lot of you listen to the show are in the single family and then you get into duplexes, fourplexes, and so sometimes you just want to know how do we get to that next step or take down a bigger deal? And we're going to dive into that right now with Michael. So, dude, thanks so much for showing up. Thanks for being here. Super excited to dive into this with you. Let's do this thing, man. Absolutely, man.
- [01:13]
B
Thanks for having me.
- [01:14]
A
I appreciate it.
- [01:15]
B
It's gonna be fun.
- [01:16]
A
And I think what's cool about your story too is like as we were talking, you've been Investing for about 10 years or so, but it's kind of been like on the side a little bit. You, you had a full time job working for soccer.com and then you kind of took that and eventually transitioned to full time working for somebody else as a real estate investor. You still didn't quite own your own thing yet. And then that was in 2017 and 2019. You went all in on, on your own company and you've been a full time investor ever since.
- [01:48]
B
Is.
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A
Is that right?
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B
Yep, 100%. Started a little over 10 years ago with a house hack. Slowly learned a little bit more, implemented as I went. Knew I wanted to do real estate full time, but I always took kind of the training wheels approach and finally, you know, took the leap of faith. Quit my full time job, went to go work for somebody else helping them run their business. And about a year and a half into that, I decided it was time to kind of move back to where my wife really wanted to live, where she grew up, and kick off my full time business from There working for myself.
- [02:21]
A
So cool, man. Yeah, I just want to touch on that because I think a lot of people are on that same path and maybe they're, you know, just getting started on it. Maybe they're in the phase of working for somebody else, learning as much as they can, or maybe they've just barely gone out on their own. But I think it's so cool to kind of see that come full circle and how you kind of worked your way up to that point and where you're at now. So without further ado, let's dive into this deal. Give us, give, give us the 10,000, 30,000 foot view approach of kind of what this deal is. How many units is it? And we'll, I'll kind of ask you some specifics as we'll, we'll kind of pick it apart, but give us the overview first off.
- [02:57]
B
Yeah, for sure. So I had been doing kind of some single family stuff, duplex, triplex, that kind of thing. And I was ready to scale it up just a little bit. And I knew that I, you know, wanted to get into the multifamily space at least a little bit. So I started networking with different brokers, looking for some off market opportunities. Within an hour drive from where I live, found one that was great. It was a 13 unit and that broker actually brought me another one. She said, hey, you know, if you're interested, I have this 45 unit. So I got really interested in that. It was always something bigger than I had anticipated jumping into, but I made the, you know, the numbers on it were going to work and we were able to find a way to put it together, go through some due diligence and it, it penciled out to, to be able to be one that I was going to be willing to take on.
- [03:47]
A
Cool. I love that, I love that you kind of had that relationship. And that led to other deals. A lot of people that, that have that same, same thing in common. I know I've got a lot of deals like that as well. Just those relationships and it leads to more and more deals. What, what was the purchase price of this thing? And then did you have any rehab on it and what does it rent for now? What's kind the overview of just the quick dirty numbers?
- [04:13]
B
Yeah, so it's 45 units. Purchase price was 2.6 million when we bought it. I think there were about 13, 14 vacancies in there that we knew we were going to need to fill. The seller offered to fill them for us, you know, prior to closing, which obviously we didn't want them to do that. It was mismanaged a little bit before. Rents were really low. They hadn't done a lot of, you know, upkeep or really a lot of unit turns where they were, you know, bringing them up to value. So we saw that as a good opportunity to, you know, fill those units at market rents. After we went in and did some repairs to them, we did about 150k up front in upfitting some of the units and then also some capex stuff. There were a lot of really old AC units that needed to be replaced. Still have probably another 10 or so that we need to do, even though we've kind of depleted the CapEx budget. So it's probably going to, you know, cut into the cash flow a little bit up front. Probably should have raised a little bit more to take care of all that in the beginning, but didn't know what I didn't know. And so that's where we're at. 2.6 purchase 150k in capex and upgrades to get it to 100% occupancy at market rents or very close. And took a little under 12 months to get there.
- [05:32]
A
Okay, cool. Awesome. And then as far as like the. You've raised rents, you said to you, you've got them up to where market should be. What, what's kind of the. What are the cash flow numbers and how did you. We'll dive into how you, how you kind of financed it, but. Yeah, what does that look like? Just to give an overview of that.
- [05:53]
B
Yeah, so I think we took gross rents from right around 18k a month up to 29, 30k a month. Our fixed expenses going out are about 10k. And then we have, you know, another, another 10k or so. That's usually the cash flow numbers where I pay my investor 8% preferred return and then I have a 60% equity split on anything above that. So cash, net cash flow for me right around 3,000, 3,500. And then obviously that's going to fluctuate a bit in year two as we go through doing some more of the CapEx stuff. That's just going to come directly from what the cash flow is.
- [06:34]
A
Totally, totally cool. I want to dive into, I want to dive into that so it doesn't go over anybody's head. But speaking of the financing this thing. Right. And maybe let's. Yeah, let's. Let's dive into financing. I know we could spend all day talking about your acquisition side of things and how you find a Lot of these, because I know it's what you do for a living now and you're full time and you're really, really good at finding good deals. And so we'll save that maybe for a longer form podcast. But as far as how you finance this thing, what, what did the first off, what did the bank want down? Did you use a bank to purchase it and how much the, the. You said 2.9 or 2.4 was the purchase?
- [07:16]
B
2. 2.6.
- [07:18]
A
2.6, yeah. So in between that.
- [07:21]
B
Yeah, yeah, close. Because right in the middle.
- [07:23]
A
Right in the middle. So 2.6. What does a bank typically look at for, for everyone that's listening that doesn't know how much cash do I need to come up with, what are the terms like that I'm typically able to get something like this financed. What does that look like?
- [07:36]
B
Yeah. So in this particular situation, we had a banking relationship that we already had, looking at some different deals, underwriting them for us. The terms of this one, it was 25% down is what we had to come up with. The rate was pretty good. I think it was four and a quarter. This was what, the beginning of last year, we have a five year, kind of like fixed term. We had a 12 month interest only period, which has been great to get it stabilized. And yeah, I think it's a 20 year a.m. cool.
- [08:13]
A
Awesome. So that's pretty standard for a commercial loan, which is awesome. It's good for people to understand that and start to see that because they're like, oh, if I take down this, how much money do I need to raise? Yada, yada, yada, yada. And, and what's interesting with this deal is you didn't put any of your own money in. Is that right?
- [08:32]
B
Yeah. Correct.
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A
Cool. So coming into it, you, you found this awesome deal, lots of margin, lots of meat on the bone, and you went and raised the money. Was that hard to do, knowing that you're not putting any of your own money in? I know a lot of people are scared of that.
- [08:49]
B
So I didn't have any experience doing this. I usually don't even raise money for like our flip deals other than, you know, maybe one or two different private investors or like a institutional hard money type deal. So I'd never really spent the time and effort going out pitching deals, looking for investors. It almost just so happened at the same time. My dad had a business that he had worked in for 30, 35 years and he was getting ready to sell it and he's like, what do I do with this. And it was almost kind of the same timeframe where I was like, well, you know, I could find a deal where we could use that money and I could also help you be able to offset, you know, some of the tax that you're going to be hit with from selling your business. So that was really what got me excited about really looking for a deal because I knew that it was going to be a win win situation to where I could fund it, you know, help my parents have some like passive cash flow and stuff coming in, help me to be able to get into this deal without, you know, running around pitching it, looking for investors and all that kind of stuff. So that's what it looked like. It was 800k invested from his side, which meant no money out of my pocket. Also covered, you know, the down payment plus the capex budget and, you know, 8% preferred return goes out to him every single month. And anything on top of that preferred return, he gets a 40 split. And we were actually able to structure because he didn't need as much of the depreciation as I was looking for. So we were able to, to set it up to where he gets 20 depreciation, I get 80%.
- [10:26]
A
That's awesome, dude, that's so cool. Yeah, I love. This is like why real estate's so amazing because you can just kind of pick apart different, different pieces of the deal and figure out, hey, what's going to create this win win scenario. And it blows people's mind. Even people will even invest, you know, just for the fact of the tax benefits so they can get the depreciation from it, you know, like that of itself is a good enough return for them. And so it's so interesting. A lot of people have that mindset of like, why is somebody gonna, you know, give me money to put into this deal, you know, that's not fair if I'm not coming up with any, any of the cash. And it's just, it just goes to show there's so many ways to slice the pie to make a win win scenario. So yeah, that's awesome. And so when you say preferred return, so everybody understands, no matter what, he's getting paid out that amount of money before you make anything.
- [11:18]
B
100 before I make anything. It's not a guaranteed return every single month. But if there is that cash flow in that 8% preferred return, before I take any kind of dollar, he's being paid, you know, the 8%.
- [11:30]
A
Yeah, that's cool, man. That's great way to structure it.
- [11:33]
B
Yeah, so I don't make any money if he doesn't make any money. And I think that's kind of how it should be if, you know, that is the investor the ultimate goal. You know, like, let's say that was a pool of other investors that I didn't have a personal or family relationship with. I want to make sure that they feel confident in the deal. They're getting paid regardless. If they're not, I'm not getting paid.
- [11:53]
A
Yeah. Yeah, I love that. And then anything about this deal in particular that made it stand out? I mean, you might have touched on it already with being able to go in there and. And raise rent more than double or close to double what was initially being collected and then, you know, stabilizing it, getting all the units rented out, fixed up a little bit. But is there anything that allowed you to, we call it force the deal where you just really got creative on it or you saw something in this deal, or there's a reason that bought it that maybe a lot of people might have missed?
- [12:28]
B
Yeah, I mean, it's just. It just comes down to being able to understand where some, like, operational inefficiencies might have been with a previous owner. You know, he collected all of his rents into one bank account with several other properties, didn't have great books. So it's almost like where you got to take a little bit of a gamble, but you can see through the deal and see that, hey, you know, there's a little bit of leap of faith there. But at the same time, I can understand that even without him having great books, I've got a banking relationship to where they're telling me, hey, if you can do X, Y and Z, and, you know, we can prove that there is income coming in from the property and the ability to go in and, you know, fill these vacancies, then it's a. It's, you know, a very good, solid deal. That's all I really had to do was, you know, prove that it was going to be a good deal and take advantage of somebody who wanted to sell but didn't have the ability to, based on the way they had been managing it, and now say, okay, no big deal, Let us figure that out. We'll take on that burden and, you know, show that it is a good deal.
- [13:35]
A
Yeah, I like that. Taking advantage of inefficiencies, that's so good. Anything from this deal, like, if you were to go back and you were to tell somebody, hey, this is how you go replicate a deal like this, or this is how you go take down, you know, these multifamily deals. Anything, they're off the bat where you're like, this is my best piece of advice to go grab these deals.
- [13:59]
B
Yeah, I mean really for me it was just a mindset thing. Like I had never envisioned a deal that size being something that I was going to be able to jump into or take down and, and have the confidence and ability to do it. But now that I've done it, it, you know, it seems much more simple to me than it did before. Before I would always over complicate it. So it's really just kind of the mindset hurdle of jumping in, taking action and actually starting to do one. Especially, you know, I felt very confident in my parents and seeing kind of how I've grown my business and you know, they wanted to be a part of that. I've been able to prove a track record of, you know, successes and different deals and then just kind of scaling up from there. Um, and it's, it's been a good, exciting kind of win, win all around and just a overall journey of that happening. So now I have that additional layer of confidence of being able to do it on a 45 unit. Now what's next? And now being able to have that track record to take to other people to show, hey, here's an opportunity if you want to place money somewhere. You know, these are the returns that we're getting. These are the, you know, you know, the experiences and the track record that we've been able to build. So it's really just kind of that mindset hurdle of jumping in, taking action and surrounding yourself with the right people that can really help you go through that underwriting process, the operations, the management. I had a good, you know, group that I was a part of that helped me go through that whole, you know, 45, 60 days of underwriting, raising money and structuring it that I felt that extra level of comfort jumping in and doing it.
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A
Yeah, that's cool. How do you find a group like that?
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B
The way I kind of found, found that group was just through networking and you know, being around similar like minded people that can connect you with other people, you know, similar to how I met you out in Maui and all those other guys out that were there at that mastermind. It just becomes this kind of camaraderie of like minded people that all want very similar, the same things and really have that mindset of, you know, giving a lot of value, helping each other grow, helping each other get to the place that they want to be. So it was through a group like that. And, you know, we have a weekly multifamily call and typically I'm in there either helping coach on the wholesaling side or the flipping side. But I knew that there were also resources for multifamily, so I jumped in there, networked with some of those guys, and you know, the guy that runs it really helped me kind of go through underwriting it and give me that extra layer of confidence to be able to take it down. So it's huge.
- [16:36]
A
Yeah, that's cool, man. Way cool. And then really, last question for you, but what would you say for a lot of people that, like I said earlier, are kind of, they've been doing these single family deals, duplexes, and they're like, I really need to like, step it up. What would you say is the first step to kind of doing these bigger deals? Aside from the mindset piece that you would tell someone, go do this, this is the first step to getting there.
- [17:04]
B
I mean, the first step to getting there, I would say get around people that have already done it before. You know, make sure that you're not going into it blind, that you can take all those same and similar skill sets that you've been using in terms of acquisition or financing on the smaller, you know, single family, smaller multifamily side to get into those kind of deals. But make sure you got somebody either in your corner as a mentor or a partner in the deal that can really just help you overcome any of the hurdles that you might run into, because you will run into things that you didn't know about or you didn't expect. And it's very easy to get nervous and just want to pull out of a deal even if you're going to lose some earnest money. Whereas if you have that partner or that person that's been there and done that before, then they're just going to let you know, hey, you know, those are false fears. Don't even worry about them. So I'd really start networking with people that have, have already done it before you even start making moves to put offers out there and, and you know, start writing up deals.
- [18:06]
A
Yeah, dude, that's so good. I love that. I love that advice. Obviously, we're passionate about that at real estate investing school. That's, that's why it's here is we hold people's hands through the entire process. So it's a blast. But. Well, dude, thanks so much. How can we connect with you? What's, what's the best way for people to reach out if they want to continue learning from you and just to get you on their. On their side and in their circle.
- [18:33]
B
Yeah, man. Probably just on Instagram. M50 is the Instagram always dming with people in there. A great place to connect and, you know, just share ideas and that kind of thing.
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A
M fitting fitty. I like it. Yeah. All right, brother. Well, hey, thanks so much, man. And stoked to. Stoked to see you here soon.
- [18:51]
B
Yeah, man, absolutely.
- [18:52]
A
Thanks for having me, Sam.