JF2539: 100% Returns in 35 Months with Jimmy Edwards #SkillsetSunday

Jimmy Edwards just closed his first full-cycle deal in his college town, giving 100% returns in just 35 months. Today we’re getting down to the numbers and learning his exact step-by-step process for successful rehabbing and rebranding. Jimmy shares what he told investors when he found out how poor conditions actually were, six key things he did to let the community know there’s new ownership, and how he knew it was time to sell. 

 

Jimmy Edwards Real Estate Background: 

  • Previous episode: JF1421
  • Just closed on first full-cycle deal — 2x multiple in 35 months, purchased at 50% occupancy, decreased to 38% occupancy, sold at 92%
  • Full-time multifamily investor
  • Invested in 570 units
  • Purchased, rehabbed, and successfully sold over 100 SFRs
  • Based in Dallas, TX
  • Say hi to him at: www.HighFiveMultifamily.com

 

Click here to know more about our sponsors:

Real Estate CFO Services

 

thinkmultifamily.com/coaching 

 

RentRedi

 

Rentify

TRANSCRIPTION

Ash Patel: Hello, Best Ever listeners, welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel, and I’m with today’s guest, Jimmy Edwards. Jimmy is joining us from Dallas, Texas.

Jimmy, thank you for joining us, and how are you today?

Jimmy Edwards: Thanks for having me. I’m doing well. How are you?

Ash Patel:  I’m doing great. And thank you. Jimmy was a guest on a previous episode. If you google Joe Fairless and Jimmy Edwards, you’ll be able to find the episode that he was on.

So today is Sunday. Best Ever listeners, we’re going to do a Skill Set Sunday, where we talk about a particular skill that our guest has. Jimmy just closed on his first full cycle deal, which yielded a two times multiple in 35 months. He purchased the property at a 50% occupancy and sold it at a 92% occupancy. Jimmy is a full-time investor and has invested in 570 units and has successfully sold over 100 single-family homes.

Jimmy, before we get into your particular skill set, can you tell us a little bit more about your background and what you’re focused on now?

Jimmy Edwards: Absolutely. I’m a full-time real estate investor, all multifamily. I’ve been in real estate pretty much my entire career, so about 15 years. I started out as a realtor, selling high rise condos in Houston. And then in the recession, I was originating loans, so I was a mortgage broker; and then in 2013, I started flipping houses full-time; 2016, I think we did 60 houses that year. And then 2017 kind of was a shift in mindset, how do we scale? Do we do more properties, bigger properties? And it was kind of a pivotal moment discovering multifamily and how to scale that way. So I’ve been doing multifamily since 2018, and haven’t looked back.

Ash Patel: Jimmy, who is the “we”?

Jimmy Edwards: I have several partners, but my main partner, her name is Kathryn and we’ve actually been friends since college. And we really started kicking it off around 2013, flipping houses together and then doing multifamily. We have several joint ventures and other co-GPs, but really we kind of do everything together. We have pretty good, complementary skill sets.

Ash Patel: Purchasing an apartment complex at a 50% occupancy – tell me about that, please.

Jimmy Edwards: Yes, so that was an interesting deal. The owner actually had to bring about 500K to closing to get out of the loan. It was a deal we looked at, it was in Lubbock, Texas, where we actually went to college. So we knew Lubbock, we knew Texas Tech, I actually knew the building, I had some friends that lived there back in the day… And we looked at it, we smelled the opportunity, it was similar to what we’ve been doing in single-family – buy distressed, rehab and sell higher. And it was 50% occupied when we bought it; shortly after takeover, it went down to mid 30s occupancy, and then we’ve filled it back up. It was, as you can imagine, a pretty significant rehab; the pool was down, 30-40 units were down units, so not even liveable. So we had a pretty substantial rehab budget, but we also got it at a really good price. So it was something that we were not afraid to do, and it worked out really well.

Ash Patel: Let’s start with the initial numbers. How many units were there?

Jimmy Edwards: So it was 103 units.

Ash Patel: What was the purchase price?

Jimmy Edwards: $3.5 million.

Ash Patel: Was it 50% occupancy at closing?

Jimmy Edwards: Right.

Ash Patel: And the seller had to come up with $500,000 to get out of the deal?

Jimmy Edwards: Yes.

Ash Patel: Do you remember what he or she paid for it?

Jimmy Edwards: I think he paid close to four. And I know that it was an interesting deal, because we’d actually contracted at 3.9. And when we initially toured the property, we saw some good make-readies, and when we did due diligence, we started walking units and we really found a bunch of cannibalized units. There were holes in the floor, you could see the dirt, and I don’t know that the seller or the broker really knew what was going on… So we went back and we said, “Guys, we found a lot more than I think any of us had expected.” So we ended up getting it for 3.5, because our budget increased. But it was a pretty big lift.

Ash Patel: When you say cannibalized units, does that mean they robbed appliances and toilets and all that good stuff?

Jimmy Edwards: Absolutely. Some units had missing appliances, some didn’t have toilets, like you said; some had fixtures, some didn’t; some had flooring, some didn’t. So they were just kind of — whenever they would turn a unit, they would pull something from another vacant one to try to put one back together.

Ash Patel: Definitely a desperate landlord at that time. Where did that $3.5 million downpayment come from? And what was that down payment?

Jimmy Edwards: So we raised equity, we syndicated that deal. I think $3.5 million was the purchase price, and we had about a million in rehab. So I think we ended up raising about a million dollars on that. We got a bank loan from a local bank that we had a relationship with, and they trusted us and believed in us. And we raised a million dollars just through friends and family and some of the multifamily networks around us.

Ash Patel: And then how did you drop occupancy to 30% when you bought it at a 50%?

Jimmy Edwards: I think it was just one of those things that they were putting people in there that probably weren’t qualified. I think they were trying to beef up the occupancy on the sale, but they were doing $99 move-in specials. And a lot of those tenants tended to move in for $99 and then stay for about 60 without paying, and then move on to the next deal. So we didn’t intend on going in and cleaning house, but it just kind of happened naturally. I think a lot of people saw new ownership, new management, it’s not going to be the easy life anymore. So we just had quite a few skips, and then probably a couple of evictions… But it was just kind of like a natural thing. But in hindsight it was what needed to happen.

Ash Patel: So a pretty rough part of town?

Jimmy Edwards: It was in a nice part of town.

Ash Patel: So a nice part of town, but just a rundown property.

Jimmy Edwards: Close to campus, just an out of state seller that didn’t have the right management company in there or didn’t have the right partnership, didn’t have the right asset manager. I’m not really sure how the ball dropped, but at some point, over a five-year span, they just stopped putting money back into the property. I think they kind of saw that there wasn’t any light at the end of the tunnel, and at that point, it just really started going downhill. So when your pool is green and never open, and when there’s no maintenance guy, he’s not repairing anything, you tend to get tenants that don’t really have any other options, so it just becomes a rundown property.

It’s about 10-15 blocks from campus. It’s workforce housing, but it’s in a nice part of town. There’s $100,000 houses around it. It’s across from a 40-acre park… A beautiful property, just didn’t have the right team in place.

Break: [07:49] to [09:50]

Ash Patel: Did you hire a PM company right away?

Jimmy Edwards: We did. So we interviewed several property management companies and initially aligned with someone that understood our vision, like we’re going to spend money and then we’re going to do a lease-up. So we hired a company, we did well at first with them, but as with a lot of things, they went through a merge, and the company from the top-down changed, so we got different results and eventually had to change to another management company that took us to the finish line and understood the vision.

So it was really important on that deal to have a company that understands turning units fast and construction and managing contractors and all that stuff, having the right construction management arm; some property management companies don’t deal with that, right? So I’m really just making sure we were aligned off the bat.

Ash Patel: What advice would you give to others in your situation that need a complete turnaround in their property when interviewing a property management company? What type of advice should they follow?

Jimmy Edwards: Really, I think, for us, and what I’ve learned is the most important person on the team comes from the top down. But I think really, the regional manager is kind of going to be the key, because the property manager is probably your most important person, but the regional is going to hire them or they’re going to fire them, and then kind of full circle… If the property manager doesn’t have support from the regional or higher up, then they’re going to sink or they’re going to quit. So we have several property management companies that we work with, and sometimes in different parts of town or different cities, two different property management companies could have two completely different regionals, right?

So what’s working with one regional may not be working in a different area. So we really go through the process of interviewing the regionals and understanding, “Hey, have you worked on projects like this? And what have your results been?” So drive other properties that are under their scope and see what they’ve done and what they’re doing and proof of concept.

Ash Patel: How often were you or your team members on-site?

Jimmy Edwards: At least once a month, in the first year, we were going back and forth monthly. Even properties that have gone the full turnaround, we’re up there once a quarter. But on that deal, we would go up there once a month and when we first got started. And when we first took over, we were there for a couple weeks, initially.

Ash Patel: Alright, because once a month doesn’t seem like often enough on a property this bad. So initially, you were there for a few weeks, got the property management company started, had enough faith in them to where you could come back once a month… What kind of updates or reports did you receive from your property management company?

Jimmy Edwards: We were getting daily reporting KPIs. And my partner, Kathryn, kind of back to that – her background is in construction management. So before we teamed up, she was doing due diligence for apartment owners and doing cap ex management. So she’s had a lot of experience managing contractors and doing stuff remotely and juggling different projects. So she was really supporting the onsite team with the management of the cap ex. So it wasn’t all on the management company. We were facilitating a lot of the cap ex on a heavy lease so that the management company could really work on the KPIs, marketing, leasing, all that stuff. So we would get daily reports, move-ins, move-outs, how many units were ready, what units we needed ready… So it was really just that factor – how do we lease this thing up and what do you need from us?

We had a team go out, and I think we gave them 20 units right off the bat to get these units ready. And we ended up having, like I said, some skips and evictions. And those units were not that bad. So we facilitated the make-ready team going in there to do those units at the same time. So we had a lot of moving parts on that deal. And as you get in there, you start hearing from tenants, “This cleanout once a month, there is sewage pouring out of it.” So we start finding out about concerns that we didn’t know about, or that you didn’t find in due diligence, and had other big repairs that we had to do. So it was pretty intense. For the first six months, it took up the majority of our time.

Ash Patel: Did your investors get spooked when occupancy went down to 30%? And how did you handle communications with your investors when you found out things are really bad?

Jimmy Edwards: Sure. We’d been buying distressed properties for the past six years, so we kind of knew there’s going to be skeletons in the closet. So we had budgeted additional money for contingencies, and we also, going in, knew we were in the red, so we got extra capital for operating costs. And I think a lot of our investors understood the type of deal and also understood our track record and experience with managing these type of rehab, even though it was in the single-family space.

So I think a lot of our investors just had faith in us as a sponsorship team. And I think that the initial drop in occupancy was kind of to be expected. And we did monthly reporting, and we provided a lot of updates. We were well-capitalized, and I think everyone had similar expectations that it was going to be a hairy deal at the start, but everyone was confident we would get it to where it needed to be.

Ash Patel: Can you talk about the GP/LP structure that you used on this deal?

Jimmy Edwards: Sure. On this deal, we had a 80/20 split with our GP team and our LP team. Kathryn and I had two other co-sponsors on this deal, who had done other projects similar to this in the past. So they had done similar heavy lifts, and had the experience and the balance sheet and some of the track record. And then we came in and said, “Hey, we’re interested in doing deals like this; we’ve found this deal, do you all want to partner together?” And we did. So it was really a good match. We had some good mentors and some good experience on the team to really move it all forward together.

Ash Patel: And was there a preferred return for the limited partners?

Jimmy Edwards: There was not. On a deal like that when we’re going into negative cash flow I’m hesitant to do a pref, just personally, because you can dig yourself in a hole if you’re not careful. So we’d projected some cash flow in year two and three, but it wasn’t a given. And I think a lot of our investors kind of knew, and they were not expecting any cash flow; this was going to be a back-end type deal. The basis that we were getting it at and the comps that we had – I think everyone understood the kind of deal that it was. And we didn’t do any distributions; the entire return was made on the back-end, and everyone was extremely happy. It exceeded our expectations.’

I think our initial projection was an 80% return in five years; the back-end of those years was going to be cash flow and then a significant part on the sale. But we exceeded that and ended up over 100% in the 35 months, like you said, and everybody, I think, wished they’d put more money into the deal.

Ash Patel: Did any of your investors want monthly/quarterly distributions? Did you lose any investors because you weren’t providing that?

Jimmy Edwards: We didn’t. I think that there’s three different types of investors out there. You have people that maybe you’re on a fixed income and cash flow is their number one thing; they’re not really even concerned about the backside. And we really didn’t have any of those in this deal. I think you also have a lot of investors that maybe they’re investing with IRA funds, or maybe they have a diverse portfolio between cash flowing deals and deals like this with [unintelligibl [00:17:30].06] I think there’s a lot of people — me specifically, I’m not living off of dividends. So I’d rather invest in a deal that’s going to make higher returns, even if it has a lower cash flow, just because that’s who I am. That’s who I’ve always been. So I think there’s just different investors for different deals, and we had a little bit of mix of both. But I think primarily, everyone understood, if you’re looking for cash flow day one, this isn’t that.

Ash Patel: Initially, it was going to be a five-year hold, but in month 35, you sold it. In what month did you know that this is the time to sell? And was it marketed or was it just an off-market offer?

Jimmy Edwards: I think it was around the 30th month, we kind of identified, “Hey, we’re at 90%.” And this was probably October of 2020. So we had come out of COVID, we did pretty well and we kind of saw that cap rates were compressing, money was coming back and pretty significantly… And we just thought, “Hey, this is a good time to sell, we can get good returns and people were interested in buying this deal.” So we had a couple opinions of values from brokers, and we actually went with the team that sold us the deal. So this was probably there. I think they sold this deal to the seller that we bought it from. So long story short, this was going to be their third time to sell the deal.

Ash Patel: Wait a minute, the seller who sold you this property, bought it back?

Jimmy Edwards: No, no, I’m sorry. We went with the broker that sold it to us, that had sold it to the seller.

Ash Patel: Okay.

Jimmy Edwards: So this was the broker’s third time transacting the same property.

Break: [19:10] to [22:14]

Ash Patel: In month 30 or thereabout, you realize now’s the time to sell. But just prior to that, you were at 90% occupancy, so you must have been cash flowing quite well.

Jimmy Edwards: Well, we did have cash flow, but we were sitting on it because we were in the middle of 2020. So — at about the same time, our interest only had either expired or about to expire. So we either needed to refi and get more interest-only, because that would have beefed up the cash flow… But we just decided, “Hey, look, this was a heavy lift. We’ve completed our business plan. Let’s let somebody else have the opportunity to keep pushing the deal. “

Ash Patel: And did you—

Jimmy Edwards: We just wanted the—

Ash Patel: —solicit feedback from investors on whether they wanted to sell or not?

Jimmy Edwards: We did, and I think everybody was of the opinion that if we could get good returns, let’s go ahead and make the sale. Yes.

Ash Patel: You don’t go broke taking a profit, right?

Jimmy Edwards: Right?! Yes.

Ash Patel: Yes. So what was your hardest lesson learned on this deal, in the 35 months?

Jimmy Edwards: There’s a lot of things that you don’t know. But looking back at all, it’s simple. This deal, specifically, it was a chiller property. And one of the chillers was new, the other was a little bit older… But one of the things that we had not expected was, in all the vacant units, we inspected all the air handlers, they were in decent shape… But one of the interesting things that we found was once we started rehabbing units, we discovered that there wasn’t any ducting. So I don’t know it this was commonplace back in the late ’60s, early ’70s, but the air handlers were just pumping air through the attic space, and we were basically cooling down the attic and not the unit. So the machine was running correctly, but it wasn’t forcing the air into the unit. So we got into this deal and then started finding, “There’s no ducting in these things” and it’s in all those paid properties. People are just running them all day. They’re complaining because they’re not getting cool. So really, that was kind of a surprise that I’d never experienced before… And one of the things that we check now, right? …that these AC units have ducting. Because you’d be surprised, sometimes they don’t.

Ash Patel: And not having adequate AC in Lubbock, Texas is a big problem.

Jimmy Edwards: It’s a little hot out there, yes.

Ash Patel: Jimmy, when you took over this property, the reputation of it had to have been abysmal.

Jimmy Edwards: Yes.

Ash Patel: What do you guys do to let the surrounding community know that there’s new ownership, there’s new life into this building, and you’re going to turn it around?

Jimmy Edwards: 100%. It had a really bad reputation. And that’s one of the things that we kind of look for when buying properties, is a) do they have an online presence? Because if they don’t, then I already know we can do a better job. But if they do have an online presence, what does it look like? And it was really bad. They hadn’t had pest control in several years, so everyone had bugs and roaches, which we had to remediate. But yes, we went in and we immediately rebranded; changed the name, put up banners and signs, under new management, under new ownership. We redid the office, so that when people, even current tenants or new people came in, they would see, “Hey, there’s a fresh new look.” And then things as simple as having people pick up trash daily, getting the pool water clear again; just things that hadn’t been done in a long time. And we did that really fast so that people knew, hey, we’re putting money into this property.

And then we did a survey with the residents, “Let us know if you have maintenance issues.” So we had dozens of tickets within the first couple of weeks. But we ramped up and had several maintenance guys, more than what the property needs to live on. And we just started going in and fixing tickets and let people know, “Hey, we’re here.” So just really trying to get a grasp on what’s going on at the property, letting people know that we’re here and we want to take care of you.

Ash Patel: And Jimmy, did you renovate these units, or just stabilized them? Was there like a gut renovation? Was there just cleaning it up, paint, lipstick?

Jimmy Edwards: About a handful of each; it was about a half and a half. Half of the units, we just went in and turned them as classics, and then the other half were in such bad shape that it’s like, “Hey, if we’re going to go in here and do flooring, carpet, resurface the counters, new appliances, it might cost us the same. Let’s make it look not like a classic.” So initially, we had a really nice product in the beginning, which was part of our business plan, too. If we’re renovating these units, we’ll go ahead and rent the classics out at this price. But we’re trying to fill this property up. So the classics were a little bit discounted from market—

Ash Patel: When you say classics, I’m assuming you mean the dated ones?

Jimmy Edwards: The dated ones, yes. The dated ones were under market; all of our prices were initially under market. So we were renting a nicer product at a market rate that the competitors were leasing a dated product, right? We wanted to fill it up, and then we’ll push rents and burn off loss to lease. So our goal was really filling it up. But yes, we only had a handful of rehabbed units. Our model was a rehabbed unit, so people would come in and they say, “Oh, this is really nice.” And then sometimes they would want a lower price, so we’d rent them a classic unit.

Ash Patel: And by not renovating all of the units, this new buyer has the potential to increase rents even further by renovating the classic units?

Jimmy Edwards: 100%. That’s their business plan. So we kind of knew that going in, a) we can save some money. Our business plan is to fill it up; we’ll rehab the down units, prove the model, and then a handful of classics to where they can keep the business plan going.

Ash Patel: Yes. And what were the numbers on that sale? The purchase price was $3.5 million.

Jimmy Edwards: $3.5, about a million in rehab and operating capital. I think we sold it right at $6.5 million.

Ash Patel: That’s a win in 35 months.

Jimmy Edwards: Yes, it worked out really well. People were really happy.

Ash Patel: Yes, doubling your money in a short time; much shorter than your projected returns.

Jimmy Edwards: Yes.

Ash Patel: Was there a waterfall clause in your operating agreement?

Jimmy Edwards: There wasn’t. That was our first deal, and looking back, I wish we would have done one. But we didn’t. So we shared all the upside equally, 80/20 with our investors. And maybe going back to your question about biggest lessons learned, if we do another heavy lift like that, I certainly think as a sponsorship team, we would look at a waterfall.

Ash Patel: What would you envision those numbers to be?

Jimmy Edwards: I think it probably depends on the deal. On a deal like that, I would think I’d go to a 50/50 split after a certain IRR. We ended up with like a 30 IRR on that deal. So every deal is different, right? But it was a lot of work.

Ash Patel: Are all of your investors in on future deals?

Jimmy Edwards: Yes. We have a lot of repeat investors; sometimes maybe all their money is spent, but we’re working on a couple things in the pipeline right now, and a lot of our investors are like, “Hey, I’ve got money. We just sold this deal. Let me know when you’ve got something coming.“

Ash Patel: Let’s do it again.

Jimmy Edwards: Yes.

Ash Patel: Yes. Well, Jimmy, thank you so much for being on the show and sharing a lot of the great advice that you’ve learned from doing your first syndication. You’ve hit an incredible return on this, a 100% in 35 months… What a win for you and your team.

How can the Best Ever listeners reach out to you?

Jimmy Edwards: Our website is  https://highfivemultifamily.com/. It’s got our bios, our deals, a little bit about us. I’ll even post this show on there, once it publishes. But yes, reach out. There’s a contact form, go in there and reach out, set up a call and we’ll get in touch.

Ash Patel: Well, Jimmy, thank you again for joining us. Best Ever listeners, thank you as well for joining us, have a best ever day.

Jimmy Edwards: Thanks for having me.

Website disclaimer

This website, including the podcasts and other content herein, are made available by Joesta PF LLC solely for informational purposes. The information, statements, comments, views and opinions expressed in this website do not constitute and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. Neither Joe Fairless nor Joesta PF LLC are providing or undertaking to provide any financial, economic, legal, accounting, tax or other advice in or by virtue of this website. The information, statements, comments, views and opinions provided in this website are general in nature, and such information, statements, comments, views and opinions are not intended to be and should not be construed as the provision of investment advice by Joe Fairless or Joesta PF LLC to that listener or generally, and do not result in any listener being considered a client or customer of Joe Fairless or Joesta PF LLC.

The information, statements, comments, views, and opinions expressed or provided in this website (including by speakers who are not officers, employees, or agents of Joe Fairless or Joesta PF LLC) are not necessarily those of Joe Fairless or Joesta PF LLC, and may not be current. Neither Joe Fairless nor Joesta PF LLC make any representation or warranty as to the accuracy or completeness of any of the information, statements, comments, views or opinions contained in this website, and any liability therefor (including in respect of direct, indirect or consequential loss or damage of any kind whatsoever) is expressly disclaimed. Neither Joe Fairless nor Joesta PF LLC undertake any obligation whatsoever to provide any form of update, amendment, change or correction to any of the information, statements, comments, views or opinions set forth in this podcast.

No part of this podcast may, without Joesta PF LLC’s prior written consent, be reproduced, redistributed, published, copied or duplicated in any form, by any means.

Joe Fairless serves as director of investor relations with Ashcroft Capital, a real estate investment firm. Ashcroft Capital is not affiliated with Joesta PF LLC or this website, and is not responsible for any of the content herein.

Oral Disclaimer

The views and opinions expressed in this podcast are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to www.bestevershow.com.

Follow Me:  
FacebooktwitterlinkedinrssyoutubeinstagramFacebooktwitterlinkedinrssyoutubeinstagram


Share this:  
FacebooktwitterpinterestlinkedinFacebooktwitterpinterestlinkedin

You may also like

Leave a comment

Joe Fairless