JF1935: Six Unit Value-Add Nashville Deal Analysis with Felipe Mejia

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Felipe is joining us today to tell us about his real estate investing journey so far. The journey includes buying, adding value, and selling a six unit apartment building. Joe will dig in on that subject, asking about the numbers, how he found it, what he did to add value, and how was the selling process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

 

Best Ever Tweet:

“Make sure you are earning while you are learning” – Felipe Mejia

 

Felipe Mejia Real Estate Background:

  • Entrepreneur, real estate investor, and small business owner
  • Scaled from a $3,000 mobile home to owning 10 units
  • Based in Nashville, TN
  • Say hi to him at https://www.sideguymovers.com/
  • Best Ever Book: Lifeonaire

 


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TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Felipe Mejia. How are you doing, Felipe?

Felipe Mejia: I’m good, brother. How are you doing?

Joe Fairless: I’m great, and looking forward to our conversation. A little bit about Felipe – he’s an entrepreneur, real estate investor and small business owner. He scaled from a $3,000 mobile home to owning ten units. Based in Nashville, Tennessee. With that being said, Felipe, do you wanna give the best ever listeners a little bit more about your background and your current focus?

Felipe Mejia: Yeah, man. Absolutely. Currently right now we run about 14 doors. We just sold our six-unit apartment complex. I own a small moving company here in Nashville. Aside from real estate, I am a father, I have a young son, and I am married here in Nashville, Tennessee. That’s about it.

Joe Fairless: Okay, well you said you’ve just sold a six-unit building?

Felipe Mejia: Yeah, man. We’ve just sold a six-unit apartment complex about an hour outside of Nashville, Tennessee, in a little town called Cookeville, TN.

Joe Fairless: Cool. And you owned that property, and then you decided to sell it?

Felipe Mejia: Yeah, I decided that it was time to get out. We kind of pumped that up as expensive as we could, we added as much added value as I think we could… I couldn’t see any way other to squeeze out anything else, and I was like “Alright, it’s time to sell it.” I think we’re at a good place in the market. I usually actually don’t sell any of my property, so this is just way too good. “You know what – I’m gonna go ahead and do it.”

Joe Fairless: And in addition to the six-unit you sold, you also have ten units that you own, correct?

Felipe Mejia: Correct, in Nashville. All single-families.

Joe Fairless: Okay, cool. So tell us about the six-unit. What did you buy it for, how long ago, what was the business plan?

Felipe Mejia: Sure. That was purchased about two years ago. I think the purchase price was 120k. We ended up selling for 260k. The main reason we got it was “Okay, it’s just good cashflow. It’s doing about $1,000/month, it’s next to the college.” The university was doing really well, so we cash-flowed on that for about a year and a half, almost two. After we reached $100,00 in equity in  a year and a half, we were like “Okay, are we gonna BRRR, are we gonna HELOC? What’s the gameplan with it?” and we decided that that was, believe it or not, the property that was doing the least amount of money and causing the most amount of headache for us… So we said “You know what – let’s sell it. Let’s reinvest that money here in Nashville, and kind of provide more houses here.” We saw the market was growing faster in Nashville than it was in Cookeville, so we decided to bring our money home.

Joe Fairless: How far away is it from where you live?

Felipe Mejia: It’s about an hour out. It’s where I went to college.

Joe Fairless: Okay, cool. And what college is that?

Felipe Mejia: Tennessee Tech University.

Joe Fairless: [laughs] You sound very proud of that, I love it.

Felipe Mejia: Well, I’m the first to go to college in my family, as a first-generation college kid, and I’m really proud that I was able to go there, and I love that I have that degree. It’s funny though, I don’t use that degree as I thought I would. I made a video recently on Instagram where I show my degree and I show the books that I’ve read on real estate, and how my real estate books have brought me way more income than my college degree ever will.

Joe Fairless: Right. If you had to pinpoint a couple benefits of doing the college experience that have gotten you to this point, what would those one or two benefits be?

Felipe Mejia: I think that college more than anything taught me how to – and I know this is gonna sound dumb – read and study. Instead of just taking a test, if you will, college allowed me to learn what I’m gonna get out of the book, versus just trying to “Okay, I know this is gonna be a question on the test.” In college I realized my passion for reading, and then I turned that passion into financial gain as well.

Joe Fairless: And let’s talk about that six-unit – what did you do to add the value?

Felipe Mejia: Sure. That unit, luckily, since it was in a city that I knew, I knew that the college students were looking for; most college students like to live with their friends in two-bedroom/one-bath apartments… One-bed/one-bath apartments weren’t doing well, so in the six-unit complex that I had, two of the units downstairs were one-bedroom/one-bath, and we would rent them out to college students, and in the living room they would set up another room… So we kind of allowed that to be a way to have more tenants come in, as well as making it more accessible to the college, as in we had friends that opened up coffee shops close to there. We partnered with them by giving discounts at our place, more college students were like “Oh, we can just go down to the coffee shop.” We offered them Wi-Fi, obviously…

You have to understand that it was a really small town. No one ever leaves, so we had to make it a very comfortable home living place where we knew that college students didn’t go home for the summer, they didn’t go home  on the weekends. This is a place where you came and you stayed all four years, and then left. So we just added as much value as a comfortable living area for college students; they really liked the space.

One of the other reasons we decided to sell it was there was a huge apartment complex that came to the town, and they raised rents by $100 a unit overnight. It was ridiculous, and everyone was moving. And rents were going up at most of the units around, just because that added value came in… And I said “I’m not gonna wanna compete with them at a later date”, and as of now we’ve been able to raise the rent to keep up with that.

Joe Fairless: So the large apartment community that was brand new was actually a benefit initially to you.

Felipe Mejia: Right, but I could see that maybe in the near future it might hold us back. We might have to  compete in pricing going forward. I don’t know that I would have had to actually drop my prices, but I knew that — they did market research as in there wasn’t enough apartment complexes, there wasn’t enough living spaces, so they knew that there was tons of people renting, so that’s why they brought 100 units to a little town like Cookeville, Tennessee. So I rode the way up, but I knew that eventually I would have to compete with them, so I said “Okay, I rode it up, my rents are up as high as I can, in competition with  them (about $25 off), but I know that their units are brand new, they have a pool – I’m never gonna compete with that”, so I said “Let me sell it tippy top that I can.” That was another reason we did it.

Joe Fairless: It sounds like, if I heard you correctly, the two things that you did was 1) you just allowed another person to live in the living room, which allowed you to increase rent… Did I hear that correctly?

Felipe Mejia: Yeah, a lot of the communities around, if it was a one-bedroom, they would only allow two people in the apartment on the lease etc. But for us, we would allow two people per room, including the living room, so they would be able to have four college students, and then we would charge per college student. If you’ve heard any of the interviews that I’ve done, you know that I focus a lot on per-bedroom, not necessarily per house.

I’ll give you a  quick example… One of the houses that we do in Nashville, for instance – we have a three-bedroom/one-bath house that we’re adding three bedroom downstairs, which literally doubles my rent in cashflow, and that’s kind of our niche in Nashville. We’ve learned a little bit of that at the six-unit apartment complex, and that’s another reason we decided to come  back to Nashville, because I could add more rooms in a single-family home with a two-car garage, versus an apartment. Like I said, I kind of capped out on the apartment complex.

Joe Fairless: Okay. And were there any local ordinances you had to double-check before saying “Yeah, more people can live here, and we’ll just put them in the living room”?

Felipe Mejia: Sure. It was a little easier because it was a college town… So when we went to the fire marshal and asked if it was okay to have 3-4 people living in this space area, the fire marshal just came out and as long as everything was up to code, they were fine. All the college students were doing it at all the other houses as well. They would have had to tear down every single house in that area if they were gonna deny me.

Joe Fairless: So that was one component of the value-add approach… And then you said the second one was just getting in with local businesses and offering discounts to your residents for the local businesses? Did I hear that correctly?

Felipe Mejia: Right. So we would market it as super-close to the local coffee shops that would give our tenants discounts to come in – half price off the coffee on the weekends, and obviously free Wi-Fi… But a lot of the times our college students didn’t wanna stay on the campus to do so, so they would go to the local coffee shops. They were really booming in Cookeville, and we were able to offer some pretty good discounts for them to stay locally close to our apartment complex, which — let’s say we lost a tenant for whatever reason; it was always at the coffee shop where we would get our next tenant, because they would all intermingle. So when people were [unintelligible [00:09:33].02] I’m like “Do you see that coffee shop walking down the road?” Boom.

Joe Fairless: So how does that work, with the discounts? Did you approach the coffee shop owner and talk to him/her about it?

Felipe Mejia: Right. So we went down to the coffee shop and let them know that we were the new owners of this property, and we wanted to build a relationship with them, and how could we add value to them. And obviously, they’d just — I mean, they’re selling coffee, they wanna sling coffee left and right. And we told them “Well, how about if we put your brochure in every one of our welcome packets into our units, and offer whatever discount you want, whether it’s five coffees and one free, or 15% off, however you wanna do that, and we’ll tell our tenants in their welcome packets about your location down the road, and how you’re college kid-friendly, to the tech students if you bring your tech ID you get certain discounts…”

A lot of our college students like that, because the complexes that were in Cookeville now had been there forever, and it was just like “Oh, this is your rent. This is what you’ve gotta pay”, and they were super-stringent with the students. They saw them as [unintelligible [00:10:35].21] So for us, they found more comfort in us, that we were good with the locals… They saw that maybe we didn’t live in Cookeville, but we were pretty local. And then the college students that used to live there, they were like “Oh, you went to tech?” and we were able to build relationships with the local little communities around there, whether it be coffee shops, or breakfast areas… And we would just offer that in their welcome packets.

Joe Fairless: So coffee shop was one of them, and then how many other businesses did you do that with?

Felipe Mejia: There were three. There was Poet’s Coffee Shop, there was Grandma’s Pancake, and there was a Mexican restaurant that we used to go to, and we offered their extremely large Burrito at a discounted rate for the college students that were living in our apartment complex, in our six-unit.

Joe Fairless: And were any of those discounts available to other people publicly?

Felipe Mejia: No. They offered tech discounts on Sunday nights, or something. Any college student could come in… But our little six-unit apartment complex had a nicer discount, especially at the coffee shop. Grandma’s Breakfast would do some pretty good discounts on their pancakes to the people that lived in our apartment complex, and then the Mexican restaurant loved to have our people over with the Mexican food.

Usually, Wednesday and Thursday night was tech nights, but our guys could come in and get that discount at any time. And they knew our tenants, because of them came in [unintelligible [00:11:51].25] they would let them know “Hey, we’re living [unintelligible [00:11:55].15] Street with Felipe”, and they would say “Oh, absolutely.” And they would bring their little brochures from their welcome packet, and that would start their relationship. After that it was really up to the restaurant to provide the great service, but we would definitely make that connection. And if college students were coming in from out of town, it automatically introduced them to the best coffee shops, to the best Mexican restaurant there, and where to get breakfast.

Joe Fairless: And they’d show proof of residency by giving them the welcome packet?

Felipe Mejia: There was a card in the welcome packet that said who they were, and they would come in to the restaurant. [unintelligible [00:12:25].16] an Airbnb, there’s like a list of local restaurants… That’s kind of what we offered them upon arrival.

Joe Fairless: Right. But how would the restaurant know that they lived at your house?

Felipe Mejia: In the welcome packet we had a card that kind of specified that, for each restaurant, and the restaurant would give it to us to give it to them.

Joe Fairless: Oh, okay, cool. So they had some special card that the restaurant or Grandma’s Pancakes or the coffee shop – each of those locations had a special card that they gave that to you, and then you put that in the welcome packet, and then the resident showed that to the business whenever they arrived.

Felipe Mejia: Right, exactly. Yeah. Kind of like when you go to  [unintelligible [00:13:03].20] and you get the little punchcard… Kind of the same concept.

Joe Fairless: And each of those three places of business had those cards already?

Felipe Mejia: Right. It wasn’t something super-fancy or something super-laminated. It was something that if I’m not mistaken they just printed out, and they gave to us to put it in their little welcome packet as people went in and out of the unit, or whenever we had new tenants, or whatever the case was.

Joe Fairless: Cool. So you bought it for $20,000/door, you sold it for $43,000/door… Nice work on that one. And that was over a two-year span.

Felipe Mejia: It was [unintelligible [00:13:38].11] We know it.

Joe Fairless: Yeah. Anything else that you did to add value, or were those the three components? You got to add more people in the rooms, putting two people in the living rooms, you have relationships with local businesses, so you constantly have leads coming in, and you’re building a sense of community within the resident base, and you had a brand new apartment community that jacked up the rents in your area, so rising tides lift all boats – anything else other than those three things?

Felipe Mejia: Man, I think that was really it. We hadn’t even gotten to doing an asphalt driveway, or [unintelligible [00:14:17].16] certain parking spaces… We hadn’t even gotten to what we were going to do, before we saw — when that apartment complex came in, we rode their tide up with rents, and then we  knew that eventually, or coming soon in the next six months we were gonna have to compete with those… And that’s what we didn’t wanna do. We saw $100,000 in equity in a year-and-a-half, close to two, and we were like “Man, let’s just pull the trigger on it and move our money closer to home.” And I’m bringing in the same cashflow almost with a single-family in Nashville.

Joe Fairless: Help me understand your thought process for why you’d have to compete with a complex in the future… Because typically, when new construction takes place, they do rent concessions in order to get through the lease-up period. Once they get out of their construction loan, then they put on long-term debt, and then that’s where the lease-ups and the concessions that they did initially then go to the wayside and they start increasing the rents significantly.

Felipe Mejia: Right, and this is what I knew being from that college town – I knew that rents would go up percentage-wise, or just based on what was around, what was growing. I saw the city was growing, and I saw that I would have to continue to pump money into that property to be able to keep up with what was coming in. You have to understand, in Cookeville – it’s a little city, potent town, there’s farms everywhere, and all of a sudden this apartment complex that comes in with the nicest, newest pool, with the best Wi-Fi, right beside the Fairgrounds; if you could see it — it looks like it doesn’t  belong there, it’s so funny. It’s such a nice apartment complex. I knew that rent was gonna keep going up for them, and people were gonna continue to pay… But they were going to be leaving the other apartment complexes. I mean, this was way advanced compared to any of the other apartment complexes there, including my six-unit.

I honestly think that they were either going to buy out the other apartment complexes, or squeeze them out based on rent. Or you had to keep pumping money into your apartment complex to make it that much nicer, to keep up with the rents… Or you were going to have to stay stagnant. You weren’t going to be able to raise your rents. Well, I guess you could, but you weren’t gonna be able to force your rents up by just adding value. You were going to have to compete with that next apartment complex. I would hear it on and on and on, “Well, we got a quote from them for this much, and you’re charging only $50 less.” I would have thought about moving to a nicer apartment complex if that was the difference… And I knew that they were gonna keep on raising it, and they were gonna keep on raising the bar. Was that a negative thing? No. But for me, I saw $100,000 in equity that I could bring closer to home, that I could 1031 into a couple single  families and add value there, easier and quicker than I would be able to in Cookeville.

Joe Fairless: Let’s talk about the 1031 process. What are a couple things you learned?

Felipe Mejia: Sure. So the 1031 process was stressful… Something that I probably wouldn’t advise anybody newer to do, or I would definitely hire a coaching  or mentoring through that process… Luckily, my sister works at a law firm where one of the lawyers also does closings. He has a branch of foundation title, and he was able to walk me through that process… But it’s not easy in that you have to claim the property and you have to do your due diligence quick. And if you don’t know that process already, you really need to have someone walk you through it.

One of the things that I learned right away was it helps to have processes already in place to make that go smoother.

Joe Fairless: For example…

Felipe Mejia: Sure. For me, when I was buying a single-family home, luckily I knew that I was gonna buy in a small sub-city inside of Nashville called [unintelligible [00:17:49].08] Tennessee, and I knew that most of those houses would have a three-bedroom/one-bath up top, and a two-car garage on the bottom. I don’t know one person that has a three-bedroom house that’s only 1,600 sqft. that needs a two-car garage. So I was able to quickly claim the properties that I wanted to purchase, because I knew that in [unintelligible [00:18:09].17] I would be able to add two bedrooms to a single-family house downstairs, because 80% of the properties were like that. So I didn’t have to wait and say “Okay, well I’m gonna go look at that property and spend more time analyzing that property.” I was able to pick 50% out of my analyzing on the property out, because I already knew that area. And if I only had 30 or 45 days to claim one of the properties in a 1031, that would have taken time away from that, where I could have done other due diligence. I was able to do two single-families out of that one, I think… Yeah, I think it was two single-families.

Joe Fairless: And just so I’m tracking correctly, it was a two-car garage and you converted one side of that two-car garage into — I thought I heard you say three bedrooms downstairs…?

Felipe Mejia: Right. So what we do is we convert the full two-car garage into three bedrooms, because also in the downstairs there was always a loft area… Imagine a bonus room on top of a garage, but this was on the downstairs of the house. So the houses in [unintelligible [00:19:08].17] 80% of them are built this way. They have three bedrooms and one bath upstairs. Downstairs they have a small loft area, and that’s about 15×20, and then a two-car garage. So I  blow out the middle wall, and then I create three bedrooms, a small kitchen area, and a shared bath. And then what I do is I rent out each room individually to the construction workers in Nashville because of the boom we’re having in construction.

Joe Fairless: Very cool. Let’s talk about numbers. Just price going into it is — let’s use a specific example, one of the two… It was how much?

Felipe Mejia: Sure, let’s just go with the recent property. The purchase price was 180k.

Joe Fairless: Purchase price 180k, and that gets you a three-bedroom house, two upstairs, with a two-car garage downstairs, with a little loft area, correct?

Felipe Mejia: Correct, yeah.

Joe Fairless: Alright. So 180k is what you buy it for. How much does it cost to do the conversion of the two-car garage into three bedrooms, a little kitchen and a bathroom?

Felipe Mejia: Sure. This is gonna blow your mind, and I want your listeners to get this… This is where I used what I thought was my weakness as my strength. I only knew construction families growing up. So I didn’t know your rich uncle banker, or your friend that his mom works at the bank to get loans, or — I didn’t have those connections; I wasn’t able to borrow money as easily as maybe other people… I don’t know. But what I did know was I wasn’t going to use that as a crutch. I was going to find a way to use that and leverage at its value. So knowing only the construction workers has allowed me to purchase labor at what I know their contractors pay them.

So this is gonna blow  your mind – I can build three bedrooms, a small kitchen and a bathroom for right under $8,000. That’s electrical, plumbing, construction work, drywall, everything. That’s about $8,000, and then maybe $3,000 or $2,000 in material. I’m always under $10,000 by a long shot.

Joe Fairless: That is good. [laughs]

Felipe Mejia: And that is only because I know those people, and they’re friends of the family as well. While I was in college I worked on a construction site, picking up sticks, cleaning construction sites. I didn’t have any specialty, I didn’t know how to frame, or hang drywall, or do plumbing, but I tell you what – I knew every single gentleman on there and I would sit there under the sun and have lunch with them during some of the days, while I was just cleaning up after them. That’s what I knew how to do; I can sweep really well. And even to this day, when they’re building my downstairs, you can ask of my tenants – I go in and I’m sweeping. My construction site is very clean, because that’s all I know how to do, as funny as that sounds. But I know this framer, and I know that this framer makes $200-$300/day, so I can pay him and he’ll frame me three rooms in 1-2 days. That’s $500.

I know the plumber, who’s gonna charge me $1,000 and he’s gonna build me a whole bathroom. He’s gonna drop in piping, he’s gonna drop in everything. And a lot of times they bring in the material from their job site and they give it to me half price, because the owner there is throwing half this stuff away anyways. I remember, I used to throw it away. All the two-by-fours that go in, I’m not kidding. This blows my mind. All the two-by-fours – “You’re throwing this away. Do you mind if I take this with me?”Absolutely. So I just took it with me, and there’s my material. And it goes on and on and on – electricians, drywall guys… I know what their date rate is, and I’ll offer them that, plus $100, or plus $50, and they love to work.

Joe Fairless: So how much was it bringing in before the renovation and how much does it bring in after the renovation?

Felipe Mejia: The if the purchase price is 180k, I’m typically gonna rent each room for probably about $450. So pre-renovations you’re looking at $1,350, if I’m doing $450. That usually covers all my expenses on the property, completely. Let’s say that I add three rooms downstairs, so now you have six rooms renting at $450. That’s $2,700.

Joe Fairless: That’s some good math, especially when you can recoup that investment of $10,000 so quickly.

Felipe Mejia: Yeah, in the first year I’ve made all my money back when it comes to any of that stuff.

Joe Fairless: Yeah. Well, taking a step back, what’s your best real estate investing advice ever?

Felipe Mejia: Learn while you earn. And the reason I say that is because a lot of people want to learn and then start earning. And I say “Look, take the plunge, buy your first rental property. Just do it, and learn as you’re earning.” One of the advice that someone once gave me was “If you buy a rental property and you make $200/month on it, you’re doing great, because you’re also getting equity, you’re also getting tax incentives…” There’s a lot more there than just the $200/month. Plus the loan paydown.

I always tell anybody that I coach or that I mentor, I say “Look, make sure that you’re earning while you’re learning. Because if not, if you’re gonna split the two, you’re gonna learn for a year and then start earning. Or learn for two years and then start earning. No. Learn and earn at the same time.”

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

Felipe Mejia: Let’s do it!

Joe Fairless: Alright, let’s do it! First, a quick word from our Best Ever partners.

Break: [00:24:21].04] to [00:24:57].06]

Joe Fairless: Alright Felipe, best ever book you’ve recently read?

Felipe Mejia: Life on Air.

Joe Fairless: What’s a mistake you’ve made on a transaction?

Felipe Mejia: Not reading the fineprint. Read it. The dirt is in the details.

Joe Fairless: What fineprint burned you?

Felipe Mejia: [laughs] Giving up equity where I knew that I probably should have waited on it. I gave up 10% on a deal because — she gave me an option of what I wanted to pay upfront, give 10% at the end of the deal, or just pay a fine for letting me borrow the money, and I decided to do 10%, and I was like “Okay, I’ll pay 10%. That’s fine.” And then we ended up selling the property and having to completely fork over 10%. That one still hurts.

Joe Fairless: What’s a deal you’ve lost money on?

Felipe Mejia: What’s *a* deal that I’ve lost money on?

Joe Fairless: Yeah.

Felipe Mejia: No real estate deal. Real estate is really forgiving. Anything I’ve lost money on is in the purchase of  a car.

Joe Fairless: Fair enough.

Felipe Mejia: I’m very picky on my real estate. I’m stingy, whatever you wanna call it, but I try not to make a mistake. The biggest mistake I made was, like I said, buying my sports car when I was 18.

Joe Fairless: Best ever way you like to give back to the community?

Felipe Mejia: Sure. I volunteer at my church in my youth group here in Smyrna, Tennessee, and I do small-time coaching and mentoring on my Instagram as much as I can.

Joe Fairless: And how can the Best Ever listeners learn more about what you’re doing?

Felipe Mejia: Absolutely. @1team_felipe on Instagram.

Joe Fairless: I really enjoyed our conversation, learning about how you’re adding value by adding bedrooms and by building relationships with people to offer them an opportunity to make more money than they typically make, and get you a really good deal as well on that, with the construction.

We talked about the three things that influence increase in value from your six-unit – the adding more tenants approach, two was having discounts to local places and partnering up with them, you also got a lot of leads from there, and then three was just luck, the apartment complex being new… But still, you put yourself in a position to be lucky by purchasing the property…

Felipe Mejia: That’s the key, Joe.

Joe Fairless: And that’s the key, exactly. That’s what a lot of people who are on the sidelines – they don’t necessarily understand as much. But when we put ourselves in a position to be lucky and we’re doing the right things, then good things tend to happen. So thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Felipe Mejia: Thanks, Joe. It was a pleasure to be on. You’re amazing. Continue doing what you’re doing.

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