Property Death Spirals: How to Buy Ugly Real Estate

Deal breakdown: buying a beat up 36-unit apartment

After 600k in repair costs

Today I’m sharing a real estate deal where we unlocked $300,000 in equity.

It starts with a Property Death Spiral.

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When I look for apartment buildings to invest in — I like the ones that:

1.) Smell funny

2.) Need maintenance 

3.) Have good bones

Some people run from ugly properties, but these are the ones that have the greatest opportunity.

Here’s how to spot (and profit from) a “property death spiral”

I love finding and investing in properties that are going through a death spiral. 

Here’s what looks like.

1. The property has extreme amounts of repairs needed

2. The owner puts lipstick on the pig to keep costs down

3. The manager has to lower his criteria to keep the occupancy up

4. Tenants that bring riff-raff, are slow to pay, likely eviction

This leads to lower monthly income, forcing the owner to sell to cover his debt service.

Now you’ve found a motivated seller.

Since we own a construction and development company — we’re able to negotiate favorable terms with the seller.

This is a “value-add deal”.

It unlocks crazy amounts of value from the property. 

I’m going to show you a deal below with:

• $1.1M purchase price

• 36-Unit apartment

• $600k needed repairs 

We fixed the roofs, common areas, paint, flooring, landscaping, and exterior appearance. 

The owner neglected these for years.

He cut corners for years leading to higher monthly repair and maintenance costs.

Deal: Before & After

Before We Purchased.

After we purchased, repaired, and rented.

This 36-unit apartment complex had an initial expense ratio of 70%+ and rents were well below market with an NOI of $77k making the building worth around $1M dollars. 

After $600k in renovations, cutting expenses, and raising rents to the market value got us the following results: 

January 2023 Financials for this Property

• Monthly Income: $27,390.50

• Expense Ratio went from 70% to 57%

• NOI went from $77,760 to 139,799.28

I have a calculator I use to help understand valuations. 

With $600k worth the upgrades we unlocked almost another $300k in equity. 

Over the next 12 months, we’ll continue to get rents up to market and decrease the expense ratio to 50% bringing in NOI closer to $180k. 

• $40k more in NOI at a 7% cap rate means $570k more to the valuation of the building. 

• Adding $1K to a building at a 7% cap rate is equal to $14,000+ dollars in valuation. 

This is why I love apartments and unleashing the delta in these buildings!

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