Is it possible for a beginner to buy a $5 million 66-unit apartment property? Yes, it is! But how? And where does the money come from? You're about to meet Allyson and in our interview, you'll discover how she did it, how she raised the money and how you can do it too!
Meet Beginner Investor Allyson
Real estate has always been Allyson Pritchett’s passion. About nine months ago she decided it was time for her to leave her corporate job to start her own commercial real estate firm. In her corporate job, she worked in a real estate division where she saw her corporation make a lot of money. She figured it would take her 15 years to make that amount of money and she didn't want to wait that long.
Know Your Why
Before leaving her corporate job, Allyson had to reflect a lot on what was driving her to take this leap and start her own real estate firm. She says, “Even as a child, I remember wanting to build and create spaces where my friends and my family and people I loved could build our lives and have our dreams and play and have fun. I think as an adult, that turned into wanting to build and create those spaces for lots of people. It's something that really drives me and that I get a lot of joy out of.”
Once Allyson decided she wanted to be an investor, own property and start her own firm, she began educating herself. She read books, covered lots of teaching material and took my Commercial Real Estate for Beginners Free Video Course. After completing all this, she realized there was still a lot she didn’t know. As she puts it, “There's a lot of things about the journey ahead that I can't see because there's a place where you know what you don't know and a place where you don't know what you don't know. I was at a place where I didn't know, what I didn't know I didn't know. And so, you get that many degrees of not knowing things and need some help. And so, that's where I said, "Okay, I need a mentor. I need a coach."”
That’s when she contacted us and joined the Commercial Property Advisors Protégé Program. We’ve been working with her for about nine months and in that time she completed her first deal, a seven-unit property for $140,000. Next, she purchased a 66-unit property for $5 million. And now, today, she has under contract a 241-unit apartment complex for $18 million.
Allyson’s $5M Deal
The Property: Allyson purchased a beautiful 66-unit apartment complex located in Texas for five million dollars. It is a stable Class C property, built in 1969 and in a great location one block from the beach. It has a working-class tenant base and 94% of the units are occupied. She was able to negotiate a fantastic price because she knew the seller motivations. Also, because she did her due diligence, she understood more about the property than maybe the seller did. All of that allowed her to negotiate a price that was almost 18% below the comps in the market. That gave her a tremendous advantage starting out. The building did have some deferred maintenance, but she had money set aside for that.
Up-side Potential and RUBS: All of you know I preach that when the rents go up and the NOI goes up, not does only the cashflow increase, but the property value goes up as well. This is so important for your exit strategy. The fact that she could do some renovation work and see an increase in rents was a great value-add. In addition, she can implement RUBS, which is another value-add. For those who don’t know, RUBS is an acronym for Resident Utility Billing System. Basically, it’s when you allocate back utility cost to the tenants.
So, Allyson was able to purchase an off-market property at a great price, with great value-adds, making this a fantastic deal.
Allyson is the ideal beginner student and followed everything to the T. However, she did face two big challenges. Challenge number one was how to finance a five million dollar project. The second hurdle was how to manage such a large commercial property with no experience.
Beginner Challenge #1: Financing the Deal
To get the best financing for this deal, our student had to put down a 30% down payment plus closing cost. The down payment and closing cost together were $2.2 million. Here's what the $2.2 million comprised of:
- 30% Down Payment
- Renovation Cost
- Working Capital (You need a savings account for your commercial property)
- Lender Reserves (The lender wanted cash reserves for maintenance on the property: we spend the money, and the lender reimburses us)
Raising the Earnest Money
Allyson said faith and perseverance were a big part of her success. At the beginning she didn’t even have the earnest money. When the seller finally said yes, she had seven days to get tens of thousands of dollars together. I suggested she talk to friends and family and find creative solutions to find the money. To her surprise it only took three days to get the earnest money deposit as well as the cash for the inspections. In fact, she managed to raise four times what she needed. Allyson quickly learned that money follows a good deal.
Finding a Loan Sponsor
The next big hurdle, once the property was under contract and the earnest money deposit was in, was finding a loan sponsor. This is another challenge a lot of beginner investors face. How do I find someone with multiple millions of dollars in net worth? Fortunately, for Allyson, she had an older brother who was able to become a loan sponsor, so that helped a lot with the deal.
Raising the Down Payment
From there she started the broader fundraising for a down payment and set up webinars. Being a part of the Protégé Program was helpful because we provide the templates and tools to create a compelling story and narrative. It's one thing to have a good deal and the right investment strategy, but you need to be able to share that story with people broadly.
After that, it just became an effort in perseverance. After the webinars, Allyson made approximately 300 follow-up phone calls. It took a lot of time, but ultimately when you have a great deal, people wanted to invest and be a part of it. By the end of it, she had over 130 investors in the deal. Allyson feels that the coaching really helped her think through the strategy, to figure out the plan of how to fundraise, and what tools were needed to go through the financing part of the process.
Beginner Challenge #2: Managing a $5M Property
The second major challenge Allyson faced as a beginner investor was how to operate and manage the property. This part of the commercial deal was critical for her. Prior to the Protégé Program, she had invested in single-family residential, with one tenant and one property, which is not as much to deal with. So, managing sixty-six tenants and the staff was one of her fears upfront. Our program alleviated her fears by providing lots of videos and trainings on how to find a good property manager. Then once she hired the property manager, we teach how to interact with them on a week-to-week basis. We provide the templates that are needed to run the meetings with them to make sure that the vacancy levels are where they need to be, and to make sure that the capital projects are happening and underway.
Allyson’s main strategy is to sell in five years. The property is on a five-year hold at this point. Mostly, that's due to the uncertainties surrounding the COVID-19 pandemic. With that, she is taking some very conservative assumptions on the front side. However, if things end up being more favorable and looking better in the first few years than anticipated, she has a back up strategy. She may consider doing a cash-out refinance at years two or year three, and her investors will get their initial equity back. Then, she will just hold and cashflow on the property.
Allyson currently has a 241-unit complex under contract for $18 million. It's actually a sister property to the property she just purchased, with the same seller and similar seller motivations. She is in the final phases of getting the rest of the capital structure together and finalizing all of the fundraising. She’ll use the same property management company and has all the different pieces of the puzzle together.
After they close just before Christmas, she will take a couple of months and let everything settle, ensuring that the 240-unit is stabilized and that she gets strong distributions for investors in the first quarter. Once all the properties are stabilized and cash flowing well, she will go back to sellers she had talked to earlier this year and start the process of pursuing more properties. Her goal for this year was three properties. The goal for next year is much more than three.
Beginner Tips from Allyson
Allyson believes her success comes down to the two things. The first is faith; believing in yourself, believing in your dreams, believing that you can do it:
“I think particularly as a rookie and as a beginner and coming out of the gate, there will be so many people that tell you that you don't know what you're doing. You should give every piece of equity in the deal away to someone else because you're a beginner and you just should be happy to be a part of it. I think having the faith in yourself to know that you can do it and you can be successful is so important because lots of people will tell you that you can't, but you can.”
The second tip is to persevere even when it seems like everything is lost:
“Don't give up because there's always a way. I think that's one of the most important things about commercial real estate is that if you look, if you search, there is always a way to make the deal happen. I’m doing all the things that I wish I could have done back when I was in the development group with a larger company. And now, I get to be at the helm, owning properties, thinking about what's going to happen to them, how we're going to change them, how we're going to make them better.”
3 Steps for Beginner Investors
You can be successful as a beginner investor, just like Allyson. All you need are the necessary tools, an effective strategy and the right mindset.
#1: Financing the Deal
Structure the Deal: How did Allyson structure the deal? She raised $2.2 million, paying her investors a preferred return. I can't mention any of the numbers because this is a SEC registered deal, but I can tell you she gave them a return between 5% and 10%. Then after that, she splits the back-end profits with investors so she can boost the overall return. Unfortunately, that's about as much detail as I can give you because it's a SEC registered deal.
Work Hard and Persevere: She made 300 to 400 phone calls to raise the capital. Now, how does she do that? Well, it comes down to how bad you want it. Allyson knew her why and worked hard to achieve her goal. She had this deal under contract but she didn't have the earnest money. So, she called me and I coached her to call friends and family and she was able to raise the earnest money deposit. Not only did she raise the earnest deposit, but after that she used the tools and materials we gave her and she made more phone calls to raise the remaining $2.2 million. Her brother did not put in the $2.2 million, she had to raise that money on her own, making hundreds of phone calls.
#2: Have an Exit strategy
We talk often about having an exit strategy because it’s so important. One of the biggest fail factors of beginner investors is not thoroughly thinking out how to exit from the deal, because exit strategy sets you up at the beginning, middle and end. So, if you don't have one, don't do the deal. Allyson’s is pretty common in syndication deals like this. She has two options. The first is to sell in five years, payback to investors and split the profits with them. She splits her profits with them and then they'll put the money back into her firm, keeping her on her syndication journey.
Her second option is to do a cash-out refi. Just like you would refinance your home, she can refinance her commercial property, pull out enough money to pay back the investors, and then keep the property herself. This would be ideal for her.
#3: Have the Right Mindset
There are two types of mindset. You can either have the right mindset for success or you can have what we call stinking thinking. Allyson had the right mindset. She shared two things that helped her the most as a beginner investor so you can do exactly what she did:
- Have faith and believe that you can negotiate a successful deal. If you don't believe you can pull it off, you're right. But if you believe you can pull it off, you're right.
- Perseverance, which is crucial in this business.
I have a video for you to watch called Do You Have the Right Mindset to Be Successful in Commercial Real Estate? If you can implement the right mindset, believe me, your life will be very different in your future.
The Benefits of Mentorship
Having a mentor has helped Allyson avoid the pitfalls that beginner investors have. She says it’s the best decision she ever made and has kept her from a lot of sharks that are out there, preying people who are new to the business. Having partnered up with an experienced mentor, who's been through all the pitfalls himself, and who has also seen a lot of things with his other students, has made it so that not only is Allyson more successful, but her investors are more successful too. Her investors can feel confident that there's a lot of expertise and wisdom behind the scenes managing their property. If you are interested in commercial real estate mentorship, please contact us here: Commercial Property Advisors Protege Program.