Lessons from an Acquisition
All quiet on the newsletter front…
If I’m not careful, I’ll have taken what was advertised as a monthly newsletter down to an annual shareholders letter.
In mid-April I closed on a 24 unit townhome community that took quite a bit of my time and energy to transact. In fact, this was my first interaction with an unfriendly [incompetent] seller. From soup to nuts it was very difficult working with them — and their bookkeeping, records, maintenance, and management were all laughably inadequate. Fortunately, we are talking about a property purchased for $1.9M that should be worth $3M. It’ll take a few years of sweat equity to achieve this difference.
A few of the key lessons I took away from this transaction:
· Have a comprehensive list of seller documents you need, do not budge from this list under any circumstances. If some documents really aren’t available, adjust your acquisition strategy.
· Don’t be afraid to re-trade deals, but it has to be for material reasons. For instance, we were told these properties were practically turnkey by the seller. Our walk-through of every single unit proved otherwise. We had a laundry list of complaints to voice and scared them saying every other buyer will have these complaints too. We talked the price down substantially due to our thorough due diligence process.
· You have to align your acquisition strategy with the profile of the deal and the profile of the seller. I engaged a Freddie Small Balance Loan for this transaction and that underwriting process carries significant scrutiny. In other words, I mismatched long-term portfolio financing with a property that needed a form of bridge debt due to the seller’s lack of documents and shoddy reporting. We pulled through in the end, but we should have utilized our bank or bridge financing options given this seller profile — rather than right into Agency. Fortunately our rate is 3.4% for 10 years, so I can’t wholly complain on the outcome and we did pull it off at least.
· Relationships are key. I heavily relied on our mortgage broker to go to bat for us time and again on this transaction. He’s an industry veteran and that carried a lot of weight keeping this deal afloat.
All in all the prospects of this acquisition are tremendous and we are very excited. With the acquisition complete, I now swap hats from buyer to asset manager. Very excited to unravel this mystery and keep you abreast of our progress.
So far we have implemented a 22% rent increase across the board and are still well below market rents. But don’t forget, we are a business and these rent increases require some quid pro quo — we are replacing all of the siding and exterior woodwork, improving the landscaping, replacing doors, among unit turnovers when they become vacant. We are also replacing all of the HVAC systems from an antiquated water-heater fed system over to modern heat-pumps and saving tenants a lot of utility costs in the long-run.
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In the meantime…
We need to discuss some of the latest news surrounding tax implications and the possible end of the 1031-exchange. It seems these scares happen every so often, but perhaps this time it’s real, so let me just say: don’t overthink the 1031 exchange debacle. If I’m investing according to my plan, 1031-exchanges are a non-issue. Restated, I hope to only buy properties that I will never ever sell.
My aim is to build long-term real estate portfolios in several markets with scalable management. Investing for the long-term is extremely difficult granted. A property may seem perfect today, you want to hold it forever, yet come 5 years later and you can’t wait to get rid of the thing. Often times this is true with selling smaller properties to exchange up to larger ones. Considering that, my aim is to create portfolios of “smaller” properties that add up to the same advantages as larger properties. It’ll never be perfect but I think it is the best way to thread this long-term investing needle.
If there’s any takeaway for the readers of my newsletter, I hope it is the perfection and commitment to your own long-term investing strategy. Short-term needs arise of course, but shouldn’t be to the detriment of your longer term goals. Next newsletter topic will dig into portfolio construction more and discuss capital allocation — all year long I’ve been seeking out advice and conversations around my proper capital allocation strategy.