While many people were hesitant about doing deals during the pandemic last year, I kept moving forward. With the 13th highest GDP in the country and the amount of people moving to the city, Denver is still a great place to buy property.
In this case study, we’ll look at an apartment building The VareCo bought in the fall of 2020, how we were able to turn the units and raise rents during a pandemic, and why I sold when the market was hot. Sometimes, the market changes faster than anticipated, and you need to pivot with it in order to succeed.
To learn about this deal in more detail, request the case study here.
- Listen to the podcast “#327: 24 Unit Syndication in Wheat Ridge” on the Denver Real Estate Investing Podcast
- Watch the YouTube video (at the bottom).
- Read the blog post. Note, the blog is an executive summary. Get the in-depth breakdown from the podcast or video.
Finding a Deal
During the spring of 2020, there weren’t a lot of transactions due to Covid. Some people were very against doing deals around this time because the market was stagnant, but I knew the fundamentals in Denver were solid.
I was meeting and talking to brokers on a daily basis looking for deals that fit The VareCo’s buy box. We were looking for off-market, value add properties that had at least 20% growth potential for rents after construction. We were looking to do a cosmetic remodel that would include new flooring, paint, countertops, etc. that would allow us to rent at $1200+ per unit.
Sourcing the Property
I got a call from a broker who’s a friend. He had a connection to a landlord who had grown weary of managing his property. Anyone who’s managed a property before knows how tough it can be, especially during a pandemic. A lot of legacy landlords are tired of managing properties, and we’re here to help them solve that problem when they’re ready.
Because of our track record, the broker knew we could move quickly. We put in an offer within 48 hours. By the time they went live to generate backup offers, we already had the deal tied up. Our initial offer was $3.7M, but during inspection we found some issues with the roof and other deferred maintenance. They took $60K off the price, and we closed in September 2020.
Implementing the Plan
The property is a 24-unit building in Wheatridge that Chris and I walked for our Real Estate Ride Along show for BiggerPockets. When we purchased it, the average rent was $800 for 2 bed/1 bath units. I knew the rents were well under market because in 2016, I purchased a fourplex down the road and the rents were $1250 back then. It was a no-brainer that we could get the rents up to at least $1295.
The initial business plan was to hold the property for three to five years and increase rents to $1495 over that time. Once we closed, we got to work on our plan. Back when I was using my own capital, I used to clear out the whole building to remodel everything at once since I didn’t need the monthly cashflow. But now that I’m doing syndication and my partners like to see monthly cashflow, I’ve pivoted to slow turns. Since we were in the middle of Covid and there were eviction moratoriums in place, we had to be more intentional anyway.
We thoughtfully and carefully met with every resident and told them when their lease was up that they had a few options. One option was to paint the walls and install new appliances, which would bump their rent up from around $750 to $1195. This rate would still be under market. About six in ten residents wanted to stay and renew at the higher rate, so we spent less than we budgeted for on those units. When residents chose to move, we did a full turn on those units.
Through the winter, we turned about three to five units per month. Depending on the state of the unit, we sometimes did half of our business model instead of the full turn. The new units rented out above pro forma, and we were able to raise the rent roll while spending less money.
Taking Advantage of a Hot Market
In 2021, the market got really hot and rents went through the roof. During the peak leasing season of March-May, we tested new units at $1495 plus rubs and filled them very quickly. We’d projected that rate in five years, but because of what we saw happening in the neighborhood, we felt confident we could hit it early. With the blended rent roll, we were getting significantly higher returns than we’d planned. In all, 15 units got the full remodel and we redid the parking lot and landscaping. The budget was $400K, but we only spent around $300K.
By May, I was getting calls from brokers saying that the market was hot and debt was a lot cheaper than it was a year ago. I got my first real offer for the building in September: $5.1M. The buyer was a group from Chicago who were looking to enter the market. This building was a good play for a syndicator looking to grow because there was room in the rents and more turns that could be done on the units. We went under contract, but I soon realized this wasn’t our buyer. They wanted unrealistic concessions that we weren’t prepared to give since we didn’t need to sell.
I contacted the broker who originally brought me the deal and asked if he wanted a shot at selling the property. He put together some soft marketing and did 12 showings to 15 people without going live on the market. We got multiple offers, one at $5.5M from someone I’ve done transactions with in the past. This was a real buyer in Denver who already had a lender on board. This was an easy decision for me, and we went under contract again, with a 60-day close and $25K in concessions for a unit we hadn’t touched.
Pivoting to Bigger Deals
Parallel to this deal, I went under contract in July for a large building down the street that has 276 units. I told my partners that they could stay in the deal and 1031 into this new building. Since we got such a good return on the original building, this was a great opportunity for them to use the same business model but just adding an extra zero.
All but two of the investors were able to roll over into the new project, and this was my first time doing a 1031 exchange with other people’s money. My legal bill was a lot higher than expected, but I learned a lot about the nuances of a complicated transaction.
How Can I Succeed in a Competitive Market?
Sourcing deals in a hot market like Denver is difficult; it takes relationships, patience, and a good team. Spend time building relationships or find a partner who already has them. We were able to move quickly because we know the part of town we’re investing in, know the tenants of our buildings, and know how to remodel. I’m excited about the group of people I work with, from the construction crew to the property managers.
Being a fiduciary now, I’ve learned a lot from investing other people’s money. I don’t need to hit homeruns; risk-adjusted singles and doubles are good enough because they know I’m a good steward who is watching over their money.
Hopefully, I can inspire and educate our audience knowing that I started in single family homes before moving onto multi family properties. You can start anywhere as long as you’re willing to work hard and make short-term sacrifices for long-term gains.
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If you’re interested in starting your own investment journey, reach out to us. We’re happy to go help you form your goals and create a roadmap for achieving them.
24 Unit Syndication in Wheat Ridge
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