How We Bought a 13-Unit Out-of-State With Seller Financing | Arizona Deal Pt. 1: The Buy

Hi, my name is Mendell Gosnell with Centurion Real Estate Management. And not only am I a property manager handling third-party property management, but I'm also a real estate investor. I've been investing in real estate for well over 20 years. And today I'd like to pull back the curtain a little bit and share an overview of a deal I was involved in over the course of the last 5, 6 years. It's an out-of-state deal in Arizona. And typically I like real estate because I like to invest locally. And that's primarily what I do. But this deal was specific in that I had some friends that convinced me to help them get into investing in real estate. And they were doing the research. And I had another buddy that was in Arizona that we could go down and stay with. And they realized that the market down there was heating up and it was maybe a good opportunity. And so, we went down there and long story short, found a deal. And I want to break down a little bit of the overview of that deal over the course of 5 years, and I'm going to break it up into 3 different parts. The buy and some of the situation surrounding how we bought it, and then part 2, the hold period, and then lastly, the sale. So there's some cool different techniques and tips and things that we did on this deal, and I think it'll be interesting for everyone to take a look at. So first, it was a partnership deal. So we formed an LLC together and went in thirds on the deal just to make it easy. We began looking, we began vetting local real estate professionals down there. And then we picked one in particular that we connected with. And we started looking at enough deals till we felt confident that there was some good opportunities. And then we booked our plane and we went down and we started looking. During that time, we also interviewed some property managers in advance, and then we were able to locate a specific deal, and then we began the negotiations on that deal. There's a lot of nuance and a lot of details, but the reality is, is not super complicated, right? You save up some money and you put it to work in real estate. That's really what it's about. And of course, there are ways to buy real estate creatively. There is an element of creative financing in this deal that we'll get to in this section, in the buy section. But the reality is, is it was just making the decision. The guys felt a little unconfident and they didn't know what to do, and so they sought out somebody that they knew who was knowledgeable in real estate, had did what they wanted to do. In some cases, you can do that by just asking questions, watching YouTube videos, but in this instance, they Pulled me into the the real estate deal with them and used it as an opportunity to get into the game. And it was also an opportunity for me to learn. It was my first time investing in out of state, and so that was a unique experience and a learning curve. But it turned out to be a really good process and turned out well over the course of a little over five years during the the course of the deal. So the the buy and the the goal here is not to You know, sound perfect, like I got it all figured out. We probably didn't do it perfect, and a lot of things that we learned along the way. But the reality is, is I think that if you don't do anything, you're certainly not gonna succeed. But if you take some chances and jump in, there's a lot more opportunity to learn and grow along the way. Certainly we'll learn. Might not always have great success, but because— Real estate, you know, usually you've got a lot of things to learn over a long period of time. And instead of, you know, I want to walk you through the real experience here, how we found the deal and our thought process on evaluating the deal and why we bought it and what we learned during the ownership and then how we eventually exited. So, this was a 13-unit multifamily property in Arizona. It was actually a mixed-use. So, it was some trailer spaces. With a multifamily apartment complex on the property. So, very unusual. Because it was unusual, the seller had owned it for I think about 5 to 7 years. I can't remember quite exactly or sometimes it's difficult to get financing on those. We could have gotten financing but he actually offered seller to carry the note and he offered pretty good terms, and we were able to negotiate even better terms, which for us was a lower down payment, which was great and allowed us to buy a bigger property for the amount of budget that me and the partners had. And then the terms, we were able to negotiate a pretty good 5-year note. So he was going to hold the note and a balloon payment at the end of those 5 years with a 30-year amortization period. And then so that made the monthly payment pretty affordable. He was open to extending that note. The interest rate was pretty favorable too, even at the time. A lot of different things came together in buying it. We found a local real estate agent that was really knowledgeable, and we spent a lot of time with him picking his brain, having him kind of educate us on the areas to invest in, the areas to stay away from, and the areas that were hard but had some potential in it, which was this area. And then we confirmed those with other individuals down there, other investors, and then all Also our property management companies. When all of those things really came together, we put in the offer, negotiated back and forth a little bit, and then we came to a deal. We did our due diligence, you know, checked out the property. I had multiple different inspectors come out and take a look at the sewer system, the roof structures, and got an independent valuation on the property as well to make sure that there was the value is there. Because oftentimes when you're purchasing With conventional financing, you're going to be required by the bank to get an appraisal. But if you're doing seller carry, you don't necessarily have to, but you should. You want that. You want that peace of mind that you kind of outside validation of the value, even though we were doing our own internal validation of what the rent roll was. And that was the other thing during that due diligence period. We were calling other property managers, working with our property manager to find out What the surrounding rental market was like, if the current rent roll was reasonable, if there was room to grow the rent roll, to raise the rents, which there were. So there was a lot of good positives there, and we did get some negatives that it was a challenging property in an area that was not the best. But if we could, if we could manage it well, we could likely force some appreciation there. We also had the ability. There was one unit that was essentially offline that we were able to bring back online. And so he kind of bought a property at one unit count and added a unit count. So that was another piece of the puzzle that we were looking at and how we could envision creating value before we even purchased the property. The other issue, maybe in this section of the buy, is kind of why Arizona. I'm a pretty big believer that One of the great things about investing in real estate is it's local, it's tangible, you can see it. Things get difficult, you can roll up your sleeves and go do the work yourself. You can take a look at it and make sure that your property management company is doing a good job overseeing it. And if you see something, you can get that taken care of. Well, when a property is out of state, you can still do that, but jumping on an airplane is another barrier to seeing it pretty often. So That was a challenge, but it really also forced us to use leverage. And again, that's a big part of real estate is leverage. You're using other people's money, other people's knowledge. And in this case, we're leveraging people and systems to manage it from a distance. Because ultimately, that is the beauty of real estate is kind of that the passive income side. And it's not truly passive. I don't know that there's anything that's really absolutely passive. But it's— I've heard the term passive Passive enough recently, and I really like that that term. It's real estate is a great investment, and you have to roll up your sleeves sometimes. You have to do some work, but it's passive, passive enough. It was a learning curve, and so I was excited about that to learn how to do something, to be forced to hire another property manager to do stuff, and doing a lot of the asset management. Ourself and trying to delegate who did what between the partners. That was probably the most difficult. A lot of the work got loaded on one of the partners in particular. And so, that always created a little bit of challenges. And, but in the due diligence period, not only do you want to lean on the resources, the experts, but, you know, I really am a big believer of learning at least enough to ask the right questions. And so, we really got our hands dirty. We went and did the inspection with inspectors and talked to the tenants and asked the on-site point of contact there a lot of questions and got feedback about the good, the pros and cons, the good, the bad, and the ugly of the property. And that was very insightful and also just helped us have a good understanding of what we were getting into, helped us get to a level of confidence before we made the ultimate decision to move forward with the deal. And so, you know, a lot of people will just look at the numbers And it's super important to look at the numbers, but again, that's just one part of the deal. And so I you got to look at the whole picture, have a vision for it, look at the again worst case scenario and the best case scenario, get feedback from a lot of people. And and of course there's some people that are just going to be naysayers and say nope it's not a good deal or you shouldn't do it. But getting as informed as you can was really really important. So buying. In Arizona was not my first inclination or my normal approach, but given the right circumstances, I probably would invest again out of state. It was really fun, cool making trips down there with friends. That was probably the highlight, seeing a different area, meeting new people. It was a little bit of a time commitment at times. We needed to go down there and it wasn't always the most convenient, but for the most part it was over the period of, again, a little over 5 years. So we also looked at just the overall market, not just the rental market, But Arizona as a whole, their industries, their demographics, and everything just looked really good overall. And we felt really confident. So we were able to move forward with it. And I think because I had an understanding about property management and investing and managing rentals, this was only a, you know, a small learning curve, just learning to— the piece of learning Arizona and learning to invest from a distance and manage from a distance. But if you were jumping in right out of the gate and you had zero, you were starting at zero, it might be a little bit more challenging. I think I've heard of people doing it, but for us it worked really well and it was overall good experience. And I think, you know, I don't want to dissuade anybody to not, not do it. So then the partnerships, I'm mostly— all the stuff that I do is mostly solo, very Limited partnerships on things over the years, but this one worked really well. It was good friends. We stayed good friends, and I think we grew closer over the the course of the the deal working together. But it it can be strict. I know that it can be stressful sometimes if you have a bad mix, or in this case, you know, we had a couple conversations of one person doing a lot of the the work, and you know what contribution each of us was bringing to it. And sometimes that's just a season of life someone's in, and you just have to have grace and not let it derail, derail you. So, but hiring the local real estate agents and finding good ones— and we, we had some cases where we connected with some that we turned out to not really enjoy working with long term, or they had a really big name but didn't turn out to be real the best choice for us. And had to pivot. But that stuff happens, and just to be aware of that. Looking at the comps, not only getting the information from the professionals but doing our own homework. And again, that really helps being in the industry, having some knowledge already. We were able to look at Zillow and talk to other property managers and drive by properties and actually call the listings and Find out firsthand what the the vacancies was like, what the pricing was like, how things were leasing, looking at how much inventory was on the market, talking to local professionals, finding out how much activity new inventory was coming on the market, things like that. Just giving us a real big understanding of what we were getting into. And as for a small deal, you know, a lot of a lot of work went into that for for just you know fourteen thirteen units. You know, looking at the deal can be really overwhelming. First, where do you start? You know, why Arizona? And usually when people ask me, I say, hey, just start in your backyard. That's going to give you the, the best ability. I think there's usually deals just everywhere you look. You just have to put the time in and be patient. But sometimes there are specific locations around the United States that are hotter than others, and it could be a really good opportunity for you to consider ramping up the learning curve on how do I invest out of state or not in my backyard. Doesn't have to be out of state. It can be, you know, an hour away, 2 hours away, 3 hours away. But understanding just the further away, the more you're going to be reliant on other individuals. Yeah, as I mentioned earlier, after evaluating everything and a couple other deals, it was ultimately the seller financing that really attracted us to this deal and the fact that we could really add value that we thought that the market was underserved here. The rents were low and the management, um, had some chinks in it that we thought we could fix, being a little bit more aggressive, uh, on cleaning up the park and enforcing some rules, get turning over some of the tenancy, and then capitalizing on some good terms with the, the seller financing. Why owner financing matters. Sometimes you'll— you have a deal that a bank won't finance, and I don't know that I would necessarily do a deal like that. I think I like the fact that I can get a seller financing but also still have the option to do financing with the bank when the time is right. I like optionality. But with this instance, it really It was a significantly lower down payment than if we went through a bank. I think it was like a third less than if we would have went with a bank. So that's pretty huge. So it allowed us to get into a bigger deal and not use up all of our capital. So we had some capital in reserve to do some improvements on the on the property, which is was pretty significant. So all these things just kind of lined up when we looked at everything. We saw it was. A good deal. But again, we looked at— we narrowed it down to a few other deals that were really good too. But when we stacked them up together, this is, this is the one that won out for, for these reasons. It just created a lot of flexibility and it made it possible for us to purchase it in a way that worked for each of the partners. So that's the other thing too, is you got to have alignment with the partnerships. So you're not only looking for a good deal that works, but But there's a lot of times there's differing goals with individuals, like, and I'm going to get to that later in this, the sell part of this 3-part series. For me, I'm buy and hold, buy and never sell. But in, in this instance, this deal, we ended up selling. And initially we were gonna kind of— spoiler alert— we were going to 1031, but we ended up not moving forward with the 1031 for a number of reasons. So with any deal, especially multifamily investing, financing can really be a make or break on the deal. You know, sometimes a property is not a great deal with traditional financing but becomes much more attractive if the seller is willing to carry the note or offer better terms or work with the buyer creatively. Several of my first deals in real estate They weren't the greatest deals, but I could get into them. And I was young, I didn't have a lot of resources. And so just to get my name on title, working with seller financing and creative financing deals was really the only option. So would I do those same deals now? Probably not. But starting off, it's, you know, a way to get in the game. And it still worked, we were able to still find cash flow. With the deal, which we'll talk more about in the hold period coming up. And just trying to think if there's any other things that I didn't cover here, maybe some of the lessons that I learned from the buy. One of the other reasons I like local is I like investing in the community that I'm living in. And so this was a little bit contra principle of mine. I really want to invest in my neighbors and the people that I'm living in, the community that I'm living in, and But it's also a lot easier to— if something happens, you can go to that person and talk to them and pick up your phone and have a conversation. And it feels like they're just, you know, they're right there. But when they're in another state, you might be able to talk to them by the phone, but you can't go meet face to face. And sometimes it's coordinating things is a little bit— seems like it takes a little longer, I would, I would, I would say. I think that's about it. Maybe though the partnership. Yeah, the second is the partnerships. They can really open the doors if you have the right partners. It can add a lot of synergy, whereas the sum of the whole is greater than the individual parts. So instead of 1 plus 1 plus 1, you know, equaling 3, you're getting a higher output because all of the talents and resources individually pulled together really helps That helps a lot. And I would say in this case that was certainly the case. Even just going down there, we were— one of the partners had a good friend that we stayed with when we were down there, and that was an awesome time. And it was also a lot cheaper. So we eliminated a lot of the extra expense, had the airfare down, and avoided the extra expense of lodging. Got to hang out with this great individual, and it was just a lot of fun. We went to some sporting events down there and always had some great times eating good food and just a lot of fun. And I think that's a big part of real estate is it's not a destination so much as it's a journey, and you should enjoy the journey. So it was good because the learning, it expanded my resources and my knowledge and put a lot of the, the skills to test in a new way, investing out of state, as I mentioned. So I think that's about it for the, the buy portion, and now I'm going to get into the hold section on the next part, and we'll continue the conversation and the dynamics around a little over 5 years of holding the property. All right, see you soon.