Discover how a 24 year old waiter from Louisiana purchased his first commercial property, a multi-million dollar 90 unit apartment complex, with no money down! His inspiring true story proves that all it takes is one commercial real estate deal to completely change your life!
A local Louisiana boy, 24 years-old Jacob put himself through college working as a waiter at a high-end restaurant. His first investment in real estate was a single family home. But having invested a lot of time and energy into it for a small amount of profit, Jacob realized that the profit margins of single-family residences would not get him to where he wanted to be in life. To achieve his financial goals he would need to invest in commercial real estate.
Jacob also has a second, powerful why that has motivated him. He grew up in a modest home and witnessed how financial struggles and stress drove a wedge between his parents. As a result, he made a promise to himself that he wasn't going to allow finances to be one of the problems in his own marriage. These are two powerful motivators, but how did this 24-year-old buy a 90-unit apartment with no money down? How did such a young man acquire this trophy asset?
Successful Marketing Strategy
Jacob came into our Protege Program as a wholesaler about a year ago. His plan was to wholesale a few deals to build up savings and then invest in his own deals. He did all his homework on how to find property and go about the wholesaling processes. When he implemented CPA marketing strategies to property owners, he received a vast number of responses. To his surprise, he was contacted by two owners, not to sell their properties, but to find out more about him. They were impressed by his marketing and knew that if the marketing had impressed them, then he was successfully marketing to other properties as well.
Partnering in a Deal
They arranged to meet with Jacob and when they found out that he was negotiating a contract with the owner of a 90-unit apartment, they asked if they could partner on the deal. At that point, Jacob consulted with me about the partnership. As he states in the interview, “Me and my young mind thought that I wanted the property for myself, and that's when you (Peter) reminded me to stay humble. You're just starting out and learning a lot."
I reminded Jacob that it's better to have a piece of a profitable deal than all of a negative deal. Fortunately, he took my advice and decided to partner with these two seasoned investors who have a lot of experience in the Baton Rouge area.
Jacob was in communication with the seller of the 90-Unit Apartment complex. He was negotiating a deal with a $3.7 million purchase price and a down payment of about 8% at $300,000. After his partners came onto the deal with him, they believed they could give the owner a better proposal that would benefit everyone. Together they negotiated with the seller to create a spectacular deal.
90 Unit Apartment Deal: No Money Down!
Property: Slightly distressed 90-unit apartment complex in a great location next door to Louisiana State University.
Seller Motivation: The seller lived about two hours away from the property and was not checking on it very often, relying mainly on the property manager. He was at the stage in life where he wanted to retire, and Jacob and his partners wanted to provide that for him. They negotiated to give the seller a big check every month, interest only for the first year.
Purchase Price: The apartment was purchased under market at $3.6 million, with no down payment. Jacob and his team negotiated a 100% financed deal, no out of pocket costs other than closing costs to the seller. Normally I do not recommend 100% financed deals. But in this case we made an exception because when we looked at the numbers, the debt coverage ratio was 1.26. That means that after he collects all the income and pays all the bills, what's left over to pay the mortgage is 1.26 times. There's plenty of cashflow left over. A very solid deal.
Creative Finance Strategy: They negotiated a five year, seller carry second mortgage for $2 million. They got a bank loan for the remaining $1.6 million to cover what was owing on the seller’s mortgage. However, they discovered that the seller only owed $1.26 million, leaving them with $340,000 "extra money” in loan dollars. They decided to give $240,000 to the seller and pay themselves $100,000 as cash at closing to jumpstart renovations on the property.
Cashflow: The cash flow just for Jacob's one third share is $100,000 per year. This is why it’s such a life-changing deal!
Rent Upside Potential: The property was already performing well, but there was a lot of deferred maintenance. The owner put a lot of trust in his property manager that was living on site and the bookkeeping was very poor. However, even with poor bookkeeping, the property was still cash flowing. Not only that, the rents were under market close to $300. That means that after renovations are completed, they can raise the rents on almost all the units by $300.
After-Repair Value: Once the property is stabilized and the rents are raised to market prices, the after-repair value is estimated to be $7 million. This number is supported by current sales comparables. Jacob and his team purchased the apartment complex for $3.6 million, which is about $40,000 per unit. Today, there are properties in the area that are selling for between $70 and $90,000 per unit. In the future, $7 million is likely a conservative number.
Exit Strategy: The exit strategy is to do a cash out refi after a year and transition into low-interest rate long-term financing. Then hold the property long-term for cashflow. They aren’t going to pull out all the equity, just enough so that Jacob’s 1/3 share will be between $250,000 and $300,000.
The biggest challenge for Jacob has been stabilizing the property and dealing with property management issues. When they purchased the apartment, Jacob and his partners decided to keep the current property manager to see how well she performed. However, they had to fire her when they found out she was collecting the rents in cash and possibly not documenting everything that was collected. Jacob has taken on that role and is learning a lot dealing with contractors, tenant relations, and transitioning new clientele.
Part of the strategy to stabilize the property is implementing a new tenant screening process. They now require a higher verified income, criminal background check, and record of previous evictions. They are also setting up a new online property management software called AppFolio which is a structured platform that keeps everything documented and tracks the overall success of the business.
It was a little nerve wrecking at first for 24-year-old Jacob, discussing million-dollar properties with older adults. But mentorship prepared Jacob to engage with seasoned investors and sellers. And he was a text book student when implementing the three pillars of the program: training, marketing and coaching. He soon realized that it's not about the numbers as much as it is personal relationships; getting to know the sellers, their motivations and what makes them happy. That’s how he pursued this seller. When Jacob found out the seller was burnt out in the business and wanted to retire, he used this motivation as a negotiating tactic. In structuring the deal, he was able to provide the seller an income so he could travel with his wife.
Big News and Future Plans
Commercial Real Estate Investing: Jacob has built-up trust with two very experienced investors and will continue to partner with them. Once the 90-unit property is stabilized, his role will be to acquire more deals and scale the business. It is a skill he learned through the Protégé Program and the teaching and marketing strategies have helped him excelled in this area.
Sometimes one commercial deal is all it takes to dramatically change your life financially, professionally, and personally.
- Financially: This 90-Unit apartment deal has given Jacob ample monthly cashflow and a stable income.
- Professionally: It has allowed him to quit his job as a waiter and go into commercial real estate fulltime.
- Personally: The financial stability this deal is providing has enabled him to propose to his girlfriend of four years!
His goal is to be financially free and travelling with his family.
A Winning Routine
One of the secrets Jacob attributes to his success is a disciplined routine. He would begin the day with a workout, then go to church every day at 9:00am. This kept him grounded and focused. After church, Jacob did his homework and research in real estate. Then at 4:00pm he would leave for work at the restaurant. He highly recommends a scheduled lifestyle because it helped him stay on track. Jacob also emphasized the importance of giving God the glory for his success and not letting his pride get in the way. Staying humble, a winning routine, and a God-centered life all worked together to lead him to this life-changing commercial deal.