Podcast Summary

Real Estate Investing School Podcast

Episode 196: REAL DEAL: The Art of No Money Down Apartment Investing
Date: September 26, 2024
Guest: Michael Fitzgerald

Overview

In this Real Deal episode, the host welcomes Michael Fitzgerald from North Carolina to discuss his transition from single-family to multifamily investments, focusing on his first larger multifamily deal: a 45-unit apartment building acquired with none of his own money. The episode offers a practical breakdown of creative deal structuring, mindset shifts, and actionable advice for investors looking to scale up to bigger real estate deals—even with limited capital.

Key Discussion Points & Insights

1. Michael’s Background & Path to Multifamily Investing

• Transition: Michael started investing on the side over ten years ago, initially through a house hack. He gradually learned the business, worked for a real estate investor to gain experience, then launched his own company full time in 2019.
• Quote: "I always took kind of the training wheels approach and finally, you know, took the leap of faith. Quit my full time job... and kick off my full time business from there working for myself." (01:49, Michael)

2. The Deal: 45-Unit Multifamily Acquisition

• Deal Sourcing:

  • Started by networking with brokers and looking for off-market opportunities within an hour of home.
  • The trusted relationship with a broker led to being shown a 13-unit, and then the 45-unit building.
  • Quote: "It was always something bigger than I had anticipated jumping into, but... the numbers on it were going to work..." (02:57, Michael)

• Basic Numbers:

  • Purchase Price: $2.6 million
  • CapEx: $150,000 initial improvements and upgrades.
  • Occupancy at Purchase: About 13-14 units vacant, property was mismanaged, with below-market rents.

• Value-Add Strategy:

  • Declined seller’s offer to fill vacancies before closing.
  • Repaired and upgraded units, eventually bringing the building to 100% occupancy within 12 months.
  • Rents: Increased from $18,000/mo to $29,000–$30,000/mo after stabilization.

• Cash Flow:

  • Fixed expenses: $10,000/mo
  • Net monthly cash flow (after paying investor's preferred return): $3,000–$3,500 for Michael.

3. Creative Financing: No Money Down Approach

• Loan Terms:

  • 25% down required by the bank
  • 4.25% interest, 5-year fixed, 20-year amortization, 12 months interest-only to allow time for stabilization.

• Raising the Down Payment and CapEx (No Personal Funds):

  • Michael’s father, who had recently sold his business, provided $800,000 covering the down payment and renovations.

  • Structure:

    • 8% Preferred Return to investor (his father) paid from cash flow before Michael receives any money.
    • Anything above 8% is a 60/40 split (60% to Michael).
    • Depreciation split: Michael negotiated 80% to himself, 20% to his father, maximizing personal tax benefit.

  • Quote: "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... I could also help you be able to offset, you know, some of the tax that you're going to be hit with..." (08:48, Michael)

  • Preferred Return Explanation: "Before I take any kind of dollar, he's being paid the 8%." (11:30, Michael)

  • Alignment: "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... that is the investor the ultimate goal." (11:33, Michael)

4. What Made This Deal Stand Out?

• Operational Inefficiency Opportunity:

  • Prior owner’s poor management created an opportunity for value, as books were bad and rents far below market.

  • Michael focused on seeing through the unclear financials by leveraging his banking relationship and confidence in creating value through management improvements.

  • Quote: "It just comes down to being able to understand where some, like, operational inefficiencies might have been with a previous owner... So it's almost like where you got to take a little bit of a gamble, but you can see through the deal..." (12:28, Michael)

5. Lessons, Mindset, and Advice

• Mindset is Key:

  • Michael emphasizes overcoming limiting beliefs and just taking action as essential for scaling up.
  • "I had never envisioned a deal that size being something that I was going to be able to jump into... Now that I’ve done it, it seems much more simple to me than it did before." (13:59, Michael)

• Networking and Community:

  • Importance of connecting with groups or masterminds where investors are actively completing similar large deals.
  • Leverage these communities for education, mentorship, handholding, and partnership opportunities.
  • Quote: "It just becomes this camaraderie of like minded people that all want very similar, the same things... giving a lot of value, helping each other grow..." (15:42, Michael)

• Practical First Steps for Listeners Wanting to Scale Up:

  • Get around people who have already done what you want to do—via networking, mentorship, partnerships, or joining groups.

  • Don’t go into larger multifamily deals blind—find someone with experience to guide you, especially in your first deals.

  • Quote: "I'd really start networking with people that have... already done it before you even start making moves to put offers out there and... start writing up deals." (17:04, Michael)

Notable Quotes & Timestamps

• On Taking the Leap

  • "I always took kind of the training wheels approach and finally... took the leap of faith. Quit my full time job." —Michael (01:49)

• On Creative Ownership Structures

  • "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." —Michael (08:48)

• On Structuring for Preferred Returns

  • "Before I take any kind of dollar, he's being paid, you know, the 8%." —Michael (11:30)

• On Mining Opportunity Through Inefficiency

  • "It just comes down to being able to understand where some, like, operational inefficiencies might have been with a previous owner... It's almost like where you got to take a little bit of a gamble, but you can see through the deal." —Michael (12:28)

• On Mindset as the Biggest Obstacle

  • "It's really just kind of that mindset hurdle of jumping in, taking action and surrounding yourself with the right people..." —Michael (13:59)

• On the Importance of Community

  • "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..." —Michael (15:42)

Important Timestamps & Segments

• 00:00–02:20 | Michael’s background & transition to full-time investing
• 02:57–05:32 | The story and numbers of the 45-unit deal
• 05:52–06:33 | How the business plan improved cash flow using value-add strategies
• 07:36–08:33 | Commercial loan specifics and typical bank terms for multifamily
• 08:33–10:26 | Raising capital creatively—structuring the deal with no personal funds
• 11:17–11:53 | Deep dive on preferred returns and equity splits
• 12:28–13:34 | Identifying opportunities in mismanaged properties
• 13:59–15:38 | Mindset, learning curves, and confidence after execution
• 15:42–16:36 | Power of communities, masterminds, and networking in scaling up
• 17:04–18:06 | Practical advice: First steps and importance of mentorship

Connect with Michael Fitzgerald

• Instagram: @MFitty

Tone of the Episode

Encouraging, practical, and demystifying. The conversation is candid, focused on actionable steps and the reality behind moving from small to large deals. Both speakers emphasize collaboration, mentorship, and the importance of breaking through mental barriers for ambitious real estate investors.