Mike Swenson & Mike Gengler - Analyzing Our 146 Unit Apartment Purchase

Do you want to know what to look for in analyzing a deal and when a deal looks good enough to move forward? Join us as we break down one of our best deals that we've taken on, how we found it, what was most appealing about it, what our future plan is with it, and where things are at today. This was a 146 unit property that we closed in July of 2024 in southern Minnesota.

In this episode, you will be able to:

• Discover the secrets to maximizing returns through strategic multifamily real estate investments.
• Uncover the path to generating passive income by participating in real estate syndication opportunities.
• Explore the lucrative potential of investing in student housing properties and how it can benefit your portfolio.
• Learn the art of effective property management to optimize your real estate investments.
• Master essential real estate investment strategies tailored for beginners to kick-start your journey in property investment.

The key moments in this episode are:
00:01:48 - Turning Around a Troubled Property
00:05:45 - Operational Improvements and Tenant Attraction
00:13:03 - Property Features and Opportunities
00:15:36 - Importance of Property Manager
00:20:20 - Financing and Projected Refinance
00:24:01 - Benefits of Syndication
00:27:18 - Seizing the Opportunity

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Read the full transcript:

Mike Gengler
It is 146 units of 200 square foot units. So all studios, which was a little bit of a turn off to start because not really what we've done so far, but that's why we have the due diligence process we went through. We looked at what we can do, we talked with our property manager, we talked with the current property manager of what's happening currently, what they see for the future. And we just saw that this, this was an amazing opportunity.

Mike Swenson
Welcome to the RELFreedom show where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some real freedom together. Hello, everybody. Welcome to another episode of RELFreedom where we're talking about building time and financial freedom through different opportunities in real estate. I'm your host, Mike Swenson. And if you want to get started on your journey investing in real estate, check out our website, freedom through real estate.com. we've got a lot of information for you to be able to read, immerse yourself in podcasts, recordings and all that kind of stuff. So go check that out. And today we're actually going to talk about another option for people we've spent a little bit of time. I've got my business partner, Mike Gengler here today. We've talked about how can you passively invest in real estate through syndications. We've also recently talked about using IRAs and how IRAs. IRAs can help you in addition to other funds you might have available for real estate. And we're going to kind of put all that together today and talk about a deal that we closed a couple months ago and just kind of share a little bit of a deep dive about how that worked, how it works for investors, what we looked for, what the opportunity was. So you guys get a chance to see what investing in a 100, essentially 150 unit apartment complex looks like. So that's a deal that we closed in July in Winona, Minnesota. And so Mike and I are going to kind of talk through that, the details, so you guys can kind of see how all that works together. So, Mike, excited to be able to dig in this with you.

Mike Gengler
Absolutely, yeah. This is one of the most exciting deals that we've done together. So really pumped to go over all the specifics and, and how we got to where we're at right now.

Mike Swenson
And I think if we were Both sitting back January 1st of last year saying, you know, would we do a 2.6, you know ish million dollar deal for roughly 150 units. A little bit shy of that. Would that be something that was possible? And we both probably said a no at that time. But you know, one thing leads to another, you take the next step. And all of a sudden we looked at a deal and we're like, hey, I think we can pull this thing off. I think it's going to work for us. And I think, you know, looking back, this will be hopefully a really great opportunity for our investors and a really easy way for them to get in, invest in real estate with minimal time commitment on their part and we do the work and they get to see their, their money grow, hopefully. So why don't you just kind of start maybe talk about the nuts and bolts of the deal and then we can dig in a little bit deeper.

Mike Gengler
Yeah. So we were with this from one of our wholesalers. They, they brought us the deal. And so when we started to dig into it, we saw that there was a lot of opportunity here. The deal is located in Winona, Minnesota. It is right across the street from Winona State University. So that's the big plus. There it is student housing. It is 146 units of 200 square foot units. So all studios, which was a little bit of a turnoff to start because not really what we've done so far, but that's why we have the due diligence process we went through, we looked at what we can do, we talked with our property manager, we talked with the current property manager of what's happening currently, what they see for the future. And we just saw that this, this was an amazing opportunity. You know, our goal is to get deals that are, you know, solid doubles. Most of, you know, for the most part, this deal is something that could really turn into a home run for us. You know, if you, if you take enough swings, eventually, you know, you just all doubles would be amazing and it's going to get us where we want to go. But eventually one of them is going to be something like this where it really just everything comes together and this could really be the, that deal for us. So we took it over from owners who about two years ago they purchased it. It was a father and daughter and they got in a little bit over their heads. They found an amazing deal. They were doing everything. They just weren't doing it on the scale that was required of a deal this size. So 146 units. They were the only two really working on it. They weren't hiring crews, they were doing all the work themselves, which is a great way to put some sweat equity into a property. Unfortunately just of a deal this size that didn't work out in the long term and they were starting to lose money because they weren't able to get enough tenants in there.

Mike Swenson
I think the, the Runway just took longer, right. Longer to drive down the Runway. The reserves that they had prepared it just ended up eating it up because they weren't able to turn it as quickly as they thought. And so their reserves were depleting a little bit faster. And then, and then, like I said, it just took longer. So, you know, in, in, you know, maybe what a. They thought was a 12 month project. They were kind of at 18 months and realizing it was going to maybe take another 12 months on top of that, or, you know, 18 months on top of that. And all of a sudden it's like shooting. I just don't think we can get this turned quick enough with how they were doing it.

Mike Gengler
Yeah, yeah. So if we go at their acquisition time, they. There was about 30 people living there. There was about 10 of them paying rent. So they really took over a property that was not functioning at all. So 145 units, 146, you know, 10 people paying rent. That is not a great occupancy. Plus you've got the huge negative of 20 other people living there. So they did.

Mike Swenson
It was foreclosed, we should mention. Foreclosed. Foreclosed, Yep.

Mike Gengler
During COVID So they, they did get a good deal on the purchase, like my auction.

Mike Swenson
Right?

Mike Gengler
They did buy it at an auction. Yep. As well. So they did do a good job getting, getting the non paying tenants out of there. They built it up to about 50 paying tenants in the two years that they had it. So that just wasn't quite enough for the time frame that they'd had it. So they updated about 40 units in that time, had people living, you know, 145 units. It's three levels, it's three wings. So there's nine separate areas. There are people living everywhere. So we came in, we raised a large rehab budget. We got our property manager on board with what that rehab plan would be, what that updating plan would be. And then we're working not only with our property manager, but with the on site person that was already there as well. So we're utilizing both of those people to really accelerate the process here. So in two years they were able to update about 40 units. In about 45 days, we were able to update about 50 units. So just having the Economies of scale here. We're a full scale operation of hiring everything out and getting that done. And so we're able to take advantage of a building this size and really get it to where it needs to be to start making money from a.

Mike Swenson
Financial standpoint, I just going to add to that. Recognizing like what the update budget really would be is like breathing oxygen into the opportunity. Right? Like, you know, being able to see, okay, when this is fully up and running, if we raise this amount, we do this with the property, you know, we can afford to have a few months of negative cash flow because we see in 12, 24 months, here's what it can be. And putting together that five year, ten year plan showing what that opportunity looks like, it's like, okay, in a five or 10 year window to have six to 12 months of negative cash flow or maybe break even cash flow, we can weather that storm. So I think that's the key there is having that additional capital to be able to pour in and pump in is going to breathe oxygen into the opportunity where they were just kind of low on that oxygen because they were kind of starting to run out of funds.

Mike Gengler
Yeah, absolutely. They were just at a point where the monthly income, they were negative cash flow. They saw the event horizon essentially, they didn't want to get to that point so they were looking to sell. And we were able to come in and our plan said, yeah, we're going to probably have six months of negative cash flow. That's what we accounted for. And with our, with our amazing team, we actually only had one. We were break even the, the second month on this property and we, we had break even months two and three and then month four. We're already positive cash flow. So things are going really well at this property. We' of, you know, we have an aggressive timeline set up for what we want to do and we're hitting that right now. We're actually a little bit ahead. As, as I said, we only had the one negative month of cash flow. So we got in there, we updated, like I said, about 50 units within the first two months. So we have almost 100 units that are rentable right now. We've got over 60 of those rented, which is amazing for you know, how what we took it over as when we took it over, there was 39 rented. We knew by the end of the end of the month we'd be down to 30 renters with lease ends. So really taking it over with 30 renters, we've doubled the occupancy since we took it over, which is very exciting. And so far we focused on the units themselves. This next part that we're moving into now is we are focusing on the amenities. So the next step is updating the bathrooms. The bathrooms are definitely dated. They weren't, they weren't comfortable, they weren't welcoming. It was definitely a very sterile type environment of like, all right, this, this doesn't look, you know, at all, at all comfortable, like I said. So that's the next spot is bathrooms, kitchens and common areas. Getting those all there, you know, to a spot where you feel comfortable. There you want, you want to hang out with your friends in the kitchen. You want to have a spot to hang out and eat, watch tv maybe, stuff like that. So we're adding in some common areas where there will be TVs, where we'll have projectors. We thought about a fitness center and then Winona, Winona State added and a state of the art fitness center right across the street. So, you know, since most of our tenants are from the school, we're not doing the fitness center. You know, you want to stay up to date with what's happening in your city and there's no reason to provide something that's already, already being provided for them. So we're gonna, you know, pick something else that will go into that area.

Mike Swenson
Laundry is another one too. You know, it was something a little underutilized. The machines were a little bit older, a little bit broken down. And so we had bought a few new machines. We've talked about, you know, instead of having coin operated machines, putting them on cards or having the ability to pay for them via credit or via card. So a lot of those things where it makes life easier for the residents and something that they want to be a part of. And, and I think that's the thing is, you know, going from a building where a couple ago it was basically empty to now we've got to start to add some of those things that are going to attract people and keep people around. And so I think that's going to be the key and then key card access, some of those things where, yeah, once again just trying to make things easy for students. So they want to be there, they want to stick around.

Mike Gengler
Yeah, absolutely. It's, you know, Winona State put up for referendum last year that they were looking for more student housing. They wanted to build a new building on campus for student housing and that was voted down. Which is one of the reasons that this is going to be an amazing opportunity for us is they're looking for more housing. So that this was like you said, this was empty slash had squatters in it two, three years ago. And we're able to come in and yeah, we want to make life better for the people who are living there. So, yeah, nobody has coins anymore. We're putting in the laundry where it's just, you got the car. Do you know, you just put your card on there, do your laundry. Making things easy. Yeah, key card access for the whole building. We're looking at getting a parcel delivery room. You know, we've got the mailboxes, but getting that parcel delivery room. 145 people living there. Hopefully, you know, in, in 12 to 18 months here, there's gonna be a lot of deliveries with Amazon and everything. So making a safe spot for that. Just a lot of stuff where you want to go in there. And you know, parents are, you know, coming through and touring, they're going to want to have a great spot for their kids to kids to live. And so having all of these options available for them where it's like, okay, I can see my kid living here. We've got storage units that weren't being utilized that are slowly starting to get utilized. We've got, I think it was 70 parking spots on the property. Those were, you know, at, you know, 20 or 30 people living there. You don't really have to worry about parking. But you know, parking is something where, okay, that's, we're, we're providing that for them. You know, we're looking at options for, hey, does the, does the school need more parking? You know, can we master lease out part of this parking lot since it is in different sections to the school for anything that they need. There's just a lot of cool opportunities with this property.

Mike Swenson
Yeah. And one other thing too is, you know, there's some adjacent properties that maybe we could acquire if we wanted to do some future growth. So I think looking at it, there's not a lot of opportunities where you can turn this much upside. You know, you might have a property that might be, let's call it 80% occupied or 90% occupied. And you can, can you take it from 80 to 95 or 90 to 95, but then you have to renovate all the units here. We almost had a blank slate of non occupied units that we could come in, renovate, put them at market rents without having to wait for their leases to come up to be able to do that. And we had some good opportunity of some common areas where we can add some value too. So I think the the upside was, was really there and then, yeah, future opportunities. Yeah, maybe we pick up some future lots down the road and, and be able to add additional buildings. So yeah, there's, there's just a lot of really, really cool things that we can do with this building long term and because of the location being so great, it's kind of a win. It's not like hey, we're a mile from campus, like we across the street from campus. So it's about as easy as possible. Real estate agents, are you tired of letting the busyness of your real estate business get in the way of your real estate investing goals in your financial future? I'm excited to announce that we've created the Real Freedom Investor Agent tribe to help you. We've got a ton of content, educational tools to help accelerate your learning curve and get you on the right path to hit your investing goals. We also have a map tribe of people just like you, agents that want to grow their own portfolio and encourage you and cheer you on along the way as well as some private one on one coaching. So go to realfreedom.com click on the store. You'll see the options there. We're so excited to be able to help you. I've priced it super low so price can't get in the way, but did want to have some skin in the game for you to help with that accountability. So go check it out. RealFreedom.com click on the store. We're excited to connect with you and excited for you to connect with your tribe of real estate agents investing, trying to build their financial freedom. Can you talk a little bit about the importance of, you know, having a great property manager or having a great solution there? Because I think when you and I first talked about it it's like, well, we don't even want to have this conversation unless our property manager is bought in. And really it's them driving this and that's the key to this, managing this asset is they've got to be on board, they've got to have the crews, all that stuff done because it's not us picking out PA paint colors and tiles and whatever that is, it's them and being able to drive that. And I think that was the other missing piece for us is when our property manager took a look at it, they were really on board and excited and kind of helped drive to that next step of the due diligence process.

Mike Gengler
Yeah, absolutely. I mean that's the huge difference between trying to do this yourself and, and having that team of people to work with that. That makes it easy. That makes it simple. You know, when we were talking to the sellers, you know, one thing that they talked about was they were doing everything themselves. And so they're telling us where they go and pick out the flooring, and they're buying it unit by unit, you know, so they're not buying it all at once. And so they're making, you know, 145 trips to Menards to buy flooring. You know, throughout the process of this is. Is almost what it sounded like. And so having this team is what makes it simple for everyone who invests in this. So we do this as a syndication, and so the people who are putting their money in are working with us. And we're not even the property managers. We have the property manager that we trust and know and wants to invest in this deal because he invested in this as well, because he believes in it. And so the people who are putting their money in are really. They are. They don't have to do anything. They put their money in, we make the decisions, and then the property manager goes and implements those decisions. So it's an amazing setup of really getting passively invested here. The property manager, yeah, he was super excited about this. You know, when I was talking to him about it, I said, hey, I want to have a conversation. Here's kind of how I see it. And I sent him all the numbers. I sent him what I thought it would rent for. And generally I'm the one sending the higher number on rental rates. I'm like, here's what I think I can get. And the property manager sending back like, hey, let's be a little bit more conservative. You probably can get that, but let's go with a little bit lower number. I sent him a number, and he actually sent me a number that was almost 20% higher than what I had sent him. And he said, this is what I in two years, this is what I want to rent these units for. And I know I can do it. It wasn't I think I can do it. I know I can do it. And I was like, okay. And he did say, here's what I need to do that. And that's the great thing about working with. With burn is he's going to tell you what you need to do. So he did send that higher number for rent, but he also said the rental, the rehab budget needs to be about almost twice as much, which is fine. Knowing that, then we just rerun our numbers and say, does this still work as a deal? And when you have that higher rental amount for the property, when you have that better living condition for the property, it makes everything so much easier. And in the end, the ROI for our investors actually increased, even though we had to raise more money for the deal and we had to put more money into the property because he said expenses would lower because we're going to do all this updating. So now our, our maintenance on the property is going to go down each month and then with the higher rental rates that he's saying he can get, because this is going to be parents finding a place for their kids to live. That's generally who's going to be paying for these places. This is what his plan is. I said, well, that sounds like a great deal now. So it went from Mike and I being like, I don't know about this, and now our property manager jumps in and is excited about it and says, here's what the plan is now. Mike and I are excited about it. Like, yeah, let's do this thing. So having that team there is, I mean, it's like a cheat code almost of. Your property manager is excited. He's coming up with plans for you. You then work together to figure out what the ultimate plan is. Taking his, his thoughts and ideas really heavily into, into it because he's there and you, you get this great, great property and great plan for, you know, we've got this planned out for the first 36 months, month by month, what we're doing and what the, what where the target goal is for, for our income. So it's a real, really positive opportunity to have your property manager excited and on board and investing with you.

Mike Swenson
Yeah, and just kind of going through some of the numbers quick. 2.65 million purchase price. We ended up raising just over a million dollars. So, you know, of that we had, I think it was about $300,000 of repairs and updates. And so we've, we've kind of got a plan of what we're going to do there in terms of financing. So we're taking over the loan that's already in place. So we proactively reached out to the lender, talked with them. Everything's on the up and up with the sellers and us about how we're taking that over, how the payments are working, them being on board with that. So decent rate. There will be, you know, kind of a bloom payment due here in a few years that we'll have to have another loan in place. But this points back to why commercial real estate is helpful, is we're in control of the value of the building. Right. We're not looking at what's the comps of the neighborhood determining our value. If we want the building to be worth more we go increase income and keep our expenses as low as possible. And so we can, we feel very confident being able to get a loan when the time is right because we're forcing that appreciation through increasing the revenue. And so that's another key factor of it. And so we were able to kind of take over this loan with, with minimal strings attacks. We didn't, we didn't even have to go to a bank to get an additional approval. We just worked with the bank that's already got the loan. They saw the writing on the wall. They know things were going to get difficult with the current owners. And so we take it over. Here's our plan, here's what we're going to do. And they were on board. So that was a very smooth process to work through that too.

Mike Gengler
Yeah, it's great to work with sellers who are willing to work with you on this is a contract for deed specifically but any type of seller financing. So we are in on a rate of 6.1% actualized rate on the property at a time when commercial mortgages were over 7. So a really good opportunity to take over a loan that was below market rate. We've got a plant, you know like you said, we've got a balloon payment due. It was from the close date, it was 38 months. So essentially a three year balloon payment due on the property. With what we have projected we've got that 2.65 million purchase price. We have a projected refinance amount at the 36 month mark of $6 million. What that does for the property is, you know, let's say we go with 67% loan to value ratio. That gives us $4 million. We're able to completely pay off the mortgage that we have. We're able to completely pay back our investors at that point all of their capital and we have $1.4 million in profits at that point to split up amongst our investors. So this is a huge opportunity for us to return the capital of our investors in less than three years and have them have profit plus starting at the 13 month mark. We already, we have cash flow included in this deal as well. So this is a huge opportunity for our investors and we've got a 6 million dollar projected value. If we come in at 5 million we're still sending back all of the capital to our investors and some profit so it's a really, really awesome opportunity. The sellers also get, you know, that monthly payment that we're sending to them. We paid off a line of credit for them that they had taken out as well. So they got what they wanted and needed out of the sale. They're still getting some monthly payments from us as well. And so it's just a really good opportunity for everybody to get what they need moving forward.

Mike Swenson
Absolutely. And, you know, a couple other things. So for those investors, we did talk, Mike and I, in a, in a past episode here about a syndication and how that works. So that's how we set this up. And so the investors that we work with were able to passively invest in this deal. We do all the work. They put in capital for a percentage of the deal. We had 25 investors in this particular deal. We had some with as low as $10,000 that came in. And so that's the beauty of doing a syndication is low barrier of entry, depending on, you know, who you're working with, not having to find the deal, do the due diligence. You essentially have to buy into us as people being responsible for executing the plan that we've put together and then buy into that plan yourself and say, yeah, here's what we want to do. You know, we had some investors that said, hey, student housing, not my cup of tea, that's okay. And so we're looking for the people that this is a fit with and they're excited about it. But, you know, somebody could write that $10,000 check, use $10,000 of an IRA, you know, transfer over money that they had saved for something else, whether it was a CD or something like that, that. And they could be in this deal just as if they were, you know, found the deal themselves. You know, that's the beauty of the syndication. And so, you know, returning the profits, the cash flow payments in the future, all of that is for them investing in this deal without having to take the calls for the tenants toilets and all that stuff that happens. And so that's why a syndication really is a great option. It's a win win for both us as the people finding the deal and putting it together and the investors being able to be a part of a deal that they couldn't do that on their own.

Mike Gengler
Yeah, absolutely. Just a lot of benefits. We're doing a segregation on this property as well. Something that for most of our investors, you know, they're W2 employees. And even for us as 1099 contract employees, we're able to take that depreciation and utilize that as a, as a tax liability and, and lower our taxable income amount for the year. So the cost segregation is a huge tool, especially for the W2 employees being able to lower that tax that they would have to pay for the year and then so that's immediate benefit without getting cash flow from the property that they're able to utilize.

Mike Swenson
Yeah, a lot of great options, a lot of win wins we felt out of this deal. So hopefully this gives you a chance to kind of see what we're thinking about, how we're pursuing this deal, how we're looking at it, some of the loose numbers. But this is what we do. So we look for great opportunities, ideally multifamily. We've also talked about maybe some other asset classes that we'd into. And so for you listening, if you want to get started investing in real estate with low barriers of entry, reach out to us. So we've got a a page set up on our main website, realfreedom.com that's r freedom.com invest and we've got information on there where you can kind of see what we do, how to get started, what that looks like. But the goal, like we said, is we want to give people as low of barrier of entry into investing in some of these large deals without all having to do all the hurdles yourself finding these deals. You can just partner with us. And so check out our website realfreedom.com invest and learn how you can get started on investing in 150 unit apartment yourself with us for future deals. So Mike, anything else that you want to add there?

Mike Gengler
There's no time like right now. It's a great time to buy. We've got other deals coming up right now that we're in the due diligence process on. So yeah, reach out to us realfreedom.com invest and we can get you into the next deal.

Mike Swenson
Thank you for sharing, Mike, and detailing how this deal came to be.

Mike Gengler
Absolutely looking forward to the next one.