The Tony Stephan Show · Episode #010
Small Multifamily With Massive Profit: $700K on 12 Units
One of Tony's coaching clients, an investor from Los Angeles, bought 12 units in Metro Detroit and texted Tony his numbers. The building brings in about $15,000 a month in gross rent, and his principal, interest, taxes and insurance come to about $9,000. After repairs and other costs, Tony estimates he keeps about $3,000 a month. Good, Tony says, but not the reason to buy.
At the whiteboard he shows the bigger picture. The client used a cost segregation study and his real estate professional status to take a large write off in the first year, and Tony reminds viewers to check with their own tax professional. Rents run about $950 to $1,000 with $400 to $500 of room to grow.
Then comes the math Tony calls the big payday. At $400 more per unit, 12 units add $4,800 a month, or $57,600 a year of new NOI. Divided by a 7.5% cap rate, that is about $768,000 of new equity on a deal he uses as a $1.5 million example. Tony explains that his and Andrea's approach is light value add: they are not flippers, and they reinvest the cash flow into the property, exterior first.
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Key takeaways
- Do not quit your job for $3,000 a month of cash flow. Keep your income and reinvest the cash flow into the property.
- NOI is income minus expenses. Divided by the cap rate, each dollar of NOI is worth about $14 of value at a 7% cap rate.
- Ask a broker in the market for the cap rate. The appraiser ultimately sets it.
- $400 more per unit on 12 units is $57,600 a year of NOI, about $768,000 of value at a 7.5% cap rate.
- Light value add: look for long held properties with artificially low rents, then improve the management instead of gutting units.
- Improve exterior to interior. Curb appeal matters for an apartment just as it does for a house.
Chapters
- 0:00 Analyzing Cash Flow
- 1:44 Tax Benefits of Ownership
- 2:49 Increasing Property Value
- 4:34 The Power of Cap Rates
- 6:08 Calculating the Payday
- 8:19 Light Value Add Strategy
FAQ
How much cash flow does the client's 12 unit make?
About $15,000 a month in gross rent against about $9,000 a month in principal, interest, taxes and insurance, so about $6,000 before other costs. Tony assumes about $3,000 a month after repairs, maintenance and utilities, and notes that a boiler or roof can erase it.
What tax benefit did the client use?
A cost segregation study, which accelerates depreciation, together with real estate professional status, which Tony describes as spending 750 hours a year actively in real estate. That let the client take a large write off in year one against earned income. Tony tells viewers to check with their own tax professional.
How does Tony calculate the value increase?
New NOI divided by the cap rate. With $400 more rent on each of 12 units, NOI rises $57,600 a year. Divided by a 7.5% cap rate, that is about $768,000 of new equity.
What is the light value add strategy?
Tony and Andrea look for properties owned for a long time by families or out of state owners, with rents kept low because there is no debt or the property is not being cared for. They improve management and service and bring rents to market, instead of spending heavily on rehab.
12 Units in Metro Detroit: Where the Real Profit Is
A text from a client
One of Tony's coaching clients, an investor from Los Angeles, bought 12 units in Metro Detroit. He texted Tony his numbers: about $15,000 a month in gross rental income, and about $9,000 a month in principal, interest, taxes and insurance. That leaves roughly $6,000 a month before repairs, maintenance and utilities. Tony cuts it in half to be safe and calls it $3,000 a month.
"You should not go quit your job to buy $3,000 worth of cash flowing real estate," Tony says. A boiler or a roof can take that cash flow away. He wants clients to keep their jobs, keep earning and reinvest the cash flow into the property. This spring, the plan is exterior first: landscaping, a new sign, a fresher look. Curb appeal matters for an apartment building the same way it does for a house.
They could not remember the exact price, something a little over a million dollars, so Tony uses $1.5 million as the example.
The first year tax benefit
The first thing the client did was take a large tax write off. He had a cost segregation study done, which accelerates depreciation, and with real estate professional status he could apply it against earned income. Tony explains that real estate professional status is not a license or a degree; it means spending 750 hours a year actively in real estate. Andrea has it. He adds that with bonus depreciation, investors are often getting back roughly what they put down in tax benefits, and he tells viewers to check with their own tax professional.
Why a dollar is not a dollar
NOI is income minus expenses, a fancy word for profit. Multifamily is a business, so its value follows its NOI. One to four unit properties are valued on comparable sales. The formula Tony wants everyone to know: every dollar of new NOI divided by the cap rate equals the value increase. A broker in the market should be able to tell you the cap rate, and the appraiser sets it in the end. This deal appraised at a 7% cap rate, so each new dollar of NOI is worth about $14.28 of value.
The big payday
The units rent for about $950 to $1,000, with $400 to $500 of room to grow. Tony uses the low end: $400 more per unit on 12 units is $4,800 a month, or $57,600 a year of new NOI. Cap rates move with interest rates, so he assumes the building is reappraised at a 7.5% cap rate in about 18 months. $57,600 divided by 0.075 is about $768,000 of new equity. "His net worth on a $1.5 million deal just went up $768,000 by doing nothing more than bringing these units to market rent," Tony says.
Light value add, not flipping
What did it cost to upgrade the units? Tony says he and Andrea are not flippers. They look for properties owned for a long time, by families passing them down or by out of state owners, where rents are artificially low. Usually that is because there is no debt and no pressure to raise rents, or because the property is not being cared for and the owner offers a low standard at a low price.
They come in, improve the property, use the cash flow to turn units and fix what needs fixing, and bring rents to market. There is no $200,000 per building or $20,000 per unit rehab. After the refinance, the client is playing with house money. Tony closes with the idea behind his channel: every family in America should own one apartment.
Transcript
0:00 Making money in multifamily comes down to simple math. That's what I'm going to show you here. One of my coaching clients just texted me. He bought 12 units. So, he's from LA. He bought 12 units here in Metro Detroit. 12 units. And he told me he's getting about $15,000 in what we call gross rental income every month. And every month his principal, interest, taxes, and insurance is $9,000. Okay. So, what's that leave him with? That leaves him with about 6,000 bucks a month in cash flow. Now, obviously, you have to pay for some like repairs and maintenance, you know, he might have to pay utilities, even though he's starting to build a lot of those back.
0:47 So, let's just say even if you cut that in half and he gets 3,000 bucks a month in cash flow off of 12 units, what did he pay for this deal? Do you remember? Like a million. We can't we can't remember right now. It was something a little over a million bucks. If you can remember, let me know. But look at this. So, he gets $3,000 a month in cash flow, right? Because everyone always wants to know, well, how much cash flow? How much cash flow to until I can quit my job or how much cash flow? So, he's getting $3,000 a month in cash flow. Cool. 36,000 bucks. Not bad. Not bad at all. Now, always be aware a big expense, a big like a boiler or a roof, that could definitely swack your cash flow there. But let's say all things considered, he's getting 6,000 a month. He pays repairs and maintenance, utilities, all that. Maybe he's left with 3,000.
1:33 Not bad. But let me show you why this deal is so much more exciting and why I want you to think about and what we always say is multifamily is a game of big payday. So the first thing he did, let's assume you can't remember what he paid for this deal. Like 1.5. Okay, so let's say 1.5. First thing they did is they took a massive tax write off. So they took a $300,000 tax write-off. Why? Because that was about what they put down for it. They did a cost segregation study. They accelerated depreciation and they were able to pull $300,000 in year one. Now they have the real estate professional status which is just 750 hours actively in real estate per year.
2:21 They can claim this $300,000 off of their earned income. This is really powerful. This is what my wife and I do. My wife is a real estate professional status. It's not a license. It's not a degree. It's not a certification. It's just saying you spend 750 hours actively in real estate. As always, check with your tax professional. You can right now because of bonus depreciation being so significant, pretty much whatever you're putting down, you're getting right back in a tax credit from the IRS. So, that's really powerful. But here's the thing. They bought this almost like half a year ago now. They had $400 in rent growth available. So these units were renting from what were they renting for? Like 950 to,000 to,000 bucks a month. So they have $400 to $500 in rent growth available.
3:07 Here's where it gets crazy. Here's where it gets exciting. Here's why I want you to think $3,000 a month is cool. It's great. You should not go quit your job to buy $3,000 worth of cash flowing real estate. I want you to keep your job, keep earning income. Take that cash flow, what we always say about cash flow, like reinvested in the property. We teach them to do exterior into interior. So, this spring, our clients saving up that cash flow, we're going to tell them do landscape. We're going to tell them do a new sign. We're going to tell them do, you know, freshen up the exterior of the building because multifamily, just like when buying a house, it's all about curb appeal, right? So, that cash flow is cool. But here's where it gets crazy and here's where I want to get you guys to. Let's go to the low end.
3:53 Okay? Let's say they were renting for a,000 bucks and he's only going to get 400 b $400 in rental increase, right? On every unit, every unit. So, there are 12 units, right? $400 in new NOI. And if you don't know, if maybe you're new to the channel here, as multifamily real estate investors, we live and die by the NOI. So, real quick, NOI is just your income minus your expenses. That's it. Okay? This is just a fancy word for profit. Okay? That's your NOI. Okay? Here's what's crazy about multifamily, though. A dollar isn't worth just a dollar. A dollar is worth 15, 14, $16 of valuation increase because a this is a business.
4:46 Buying multifamily is a business. When you buy one to four units, it's only valued based on comparable sales. So, a dollar every $1 in new NOI divided by the cap rate equals your value increase. People always ask, "Tony, where's the cap rate? How do I find the cap rate?" A broker should be able to tell you, if you're buying in their market, they should be able to tell you like, "Hey, here's the cap rate from this market." The appraiser is the ultimate one to set the cap rate, but we knew this deal appraised for a 7% cap rate. So, for every dollar they can increase the NOI in, you just pull out your calculator, dollar divided by 0.07, that's worth $1428 in valuation. This is where you make the big money.
5:35 So, let's go back to that example and let me know. Am I losing you? Is this making sense? Put a comment in this in the comment section if you have a question. If something's not making sense, maybe go watch some of my other videos because I really break this down. But this is all you need to know. Every dollar, every dollar divided by the cap rate equals my valuation increase. You're playing with a multiple effect of money. It's substantial. It's the only business you can do this in. Like in my business, I make a dollar. It's worth a dollar. Multifamily, a dollar can be worth 14, $1,15, $16. So, we said they had 12 units. And this is all you need to know to be able to learn this game. It's stupidly simple and easy. 12 units, he can get $400 rent. So, when we underwrote this deal together, when I was showing him this deal, when we were looking at it together via Zoom, because he's in LA, I'm here in Troy, Michigan.
6:26 We're looking at it. We're like, bro, number of units, we got 12. How much rent growth do we have? We have 400 per unit. So, we go 12 multiplied by 400. What is that? 4,800 bucks a month in more cash flow, but new NOI because that's extra income. Income, remember back to our NOI statement. Income minus expenses equals NOI. Can you see that over there? Beautiful. Okay, so that's $48 $4,800 a month times 12 months, right? I should be saying multiplies. Multiplies. My grade school teachers would be very upset. Multiplied. That's $57,600 in new NOI.
7:14 That is powerful. That is, yes, free cash flow. But remember, so is the building worth $57,600 more? No. Because remember, new NOI divided by the cap rate. Cap rates do tend to go up over time, right? It all depends on interest rates. I'm not an economist, so you can Google the migration of cap rates over time. So, this is his new NOI. Let's just clear it up here. He got he's got $57,600 in new NOI. Let's say the building in 18 months, he gets it reappraised at a 7.5% cap rate. How much money did he just make? Let's do the math. 57,600 divided by 0.075. He just created $768,000 in new equity.
8:08 His net worth on a $1.5 million deal just went up $768,000 by doing nothing more than bringing these units to market rent. Something else you might be wondering, but how much money did he have to invest to upgrade those units? What's his rehab cost? We don't we are not flippers. My wife and I are not flippers. So, we teach what we do. We look for historically longtime owned assets by either families who have passed it through generations or out ofate owners who have artificially low rents, artificially low NOI. Why is it low? Because they're either not taking care of it. Rents are low for two reasons. It's been owned for so long, there's no debt on the property, they don't have to increase the rent.
8:56 Or number two, it's not being taken care of. And because they're providing a low standard, they're offering low rents, right? We see that all the time. Hey, I'm not going to fix your garbage disposal because you're paying $600 in rent. So, we come in, we improve that property, we try to use the cash flow, we try to make sure, remember that $3,000 a month, dude, pump that back into the property. Turn units. Do what you have to do. Fix it up to get to this big payday to make this amount of money. What other asset can you buy 1.5 million worth of stocks, only put $300,000 down and make it worth $768,000 in a year? Absolutely not. This is the game. And this is what we call the light value ad strategy. There's no rehab cost. We're not then pumping in $200,000 per building or 20 grand per unit.
9:46 We don't do that stuff. This is what we do. Now, after he refies and pulls money out, oh, dude, he can go do whatever he wants. He's playing with house money. But this is what we teach. So, hey, if this was valuable, let me know. Put a comment in the comment section. Again, you can get in this game, too. If you want to learn more about this, grab the book for free. You can buy it on Amazon, but grab it for free. Link in the description. If you want to learn more about our mentorship program and how we're helping everyday people do this, click the link in the description. If you made it to the end, drop a meaningful comment in the comment section. Let me know, is this valuable? Do you like this type of content or do you hate it? I don't know. Let me know because I make these videos for you. So, let me know. Put in the comment section. Every single family in America needs to own one apartment and I'm here to help you get in the game. Till next time, we'll talk soon. Thanks.
Topics: Deal Review, 10+ Units, Out of State, BRRRR, Tax Benefits
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