Out of Money Mid-Renovation: 3 Ways to Save the Deal

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0:00 Today you're going to join me in the
0:02 field in Steamville, Texas at 26 unit
0:04 where we ran out of money. And this is a
0:06 super common issue that happens. What
0:08 happens when you have a great project,
0:09 you buy a deal, you absolutely love it,
0:11 and you spend more than all of your
0:13 money available finishing the project.
0:16 This is a LLC where the bank account
0:18 actually went to zero, actually
0:20 technically a little bit beyond. And how
0:22 do you actually fix it when you're still
0:23 mid- project? I'll go through multiple
0:25 different ways where you can organize
0:26 the capital. And meanwhile, I'll walk
0:28 you through the grossest units in my
0:30 portfolio as we are finishing them out
0:31 now. Now, in 3 weeks, these are all
0:33 going to be finished and they're already
0:34 pre-leased, but they are some heavy
0:37 turns. I'll see you there. All right,
0:38 this is my first time in these units, so
0:40 we'll see how it goes. This one is
0:42 already underway, but you can probably
0:44 see just how nasty those walls are. The
0:47 smell is hard to describe, so we'll just
0:50 say very bad. Overall though, we're
0:52 already working on this unit, so this
0:53 will not be the nastiest unit on the
0:55 tour. But this is the type of stuff you
0:56 deal with as a landlord. If you're
0:57 looking behind me here, there's holes in
0:59 the walls. It's not painted well.
1:01 There's dirt everywhere. And by holes in
1:03 the walls, I mean there's like a lot of
1:05 holes in the wall. We're going to need
1:06 to redrywall a ton of this. This isn't
1:09 just slap mud on it. We're going to need
1:10 to do some cosmetic fixes. The toilet
1:13 itself is absolutely annihilated. And
1:16 you probably can't see them. There's a
1:17 good deal of bugs in here. So, I'm
1:18 keeping my feet moving. Uh cuz I don't
1:20 want to take those all home with me.
1:21 This unit's pretty gross. Apparently,
1:23 it's going to get worse from here, but
1:25 uh yuck. The problem with the campus is
1:27 we had a bunch of tenants like this, so
1:29 the unit turns cost more and there were
1:31 more overall turnovers. So, we blew
1:33 through the budget. We originally
1:34 allocated $75,000 to do unit turns as
1:37 the campus only had two vacancies when
1:39 we started. We figured I'll probably
1:40 keep most people as we started greasing
1:42 rents. Rents today around 750. So, going
1:45 550 to 750, you know, you're going to
1:46 lose a few. But, uh man, the pipe ten
1:49 that we ended up with was a little bit
1:50 rougher. It took us instead of 1 year, 2
1:53 years to get the campus where we want
1:54 it. Uh, by the way, every unit's leased.
1:56 So, there's moveins happening in 3
1:58 weeks. This entire campus will be turned
2:00 and beautiful by that time. All right,
2:02 this one was a bed bug unit. Check this
2:04 out. There was so much tobacco smoke in
2:06 here. It's literally oozing out of the
2:08 walls. This one's going to be one of our
2:10 heaviest turns. We're going to be
2:12 ripping out drywall and just redoing it.
2:14 It's not worth killing over it when it's
2:16 this bad. If you get any humidity, it'll
2:19 bleed right back through. Just
2:21 absolutely disgusting. Uh, we did
2:24 remediate the bed bugs, but I am still
2:26 stepping gingerly as I see a couple
2:29 still on the wall. If you guys want to
2:30 see what a bed bug looks like, that
2:33 there, that little guy is Mr. Nasty. We
2:37 do not want those. And that is still
2:38 live. And I'm going to run out of this
2:40 unit before I take any home with me. So,
2:41 we purchased this property for $1.6
2:43 million. Fully stabilized and optimized.
2:45 that is worth about 26 about $100,000
2:48 per door of value. Right now, it's
2:50 probably worth 2.2 with how far we are
2:52 in our leasing. When you run out of
2:54 money on this, you want to make sure
2:55 that you didn't overpay and run out of
2:57 money cuz then you're really limited on
2:58 moves. For a campus like this, you
3:01 actually have quite a few options
3:02 available if you still have a
3:04 fundamentally good deal, just not enough
3:06 cash, which fortunately is where we're
3:08 at for this property here. I promised
3:10 you Super Nasty. So, welcome to Super
3:11 Nasty. I'm actually going to flip the
3:12 camera around and I'm going to do a
3:13 speedrun of this cuz I really don't want
3:15 to go in. So, here are your floors.
3:18 Laminate absolutely chewed up. Just
3:21 moisture, mold, dog piss. I had bugs
3:24 everywhere. This is actually a unit that
3:26 had carpet. The carpet was so moldy with
3:28 so much pee in it. Uh we just had to pay
3:31 someone to pull it out and uh run.
3:34 Everything needs to be pulled in here.
3:36 We're going to replace the cabinets,
3:37 walls, floors. This is just uber nasty
3:39 and uber stinky. But this is what we
3:42 deal with uh that we weren't
3:44 anticipating when we bought this
3:45 building. We actually did a walk through
3:46 this unit. It was actually not bad. This
3:48 is a tenant who uh destroyed it very
3:50 rapidly, very badly. So now that total
3:52 renovation is going to cost probably
3:54 over $10,000, possibly significantly
3:57 more than $10,000. Um and again on this
4:01 particular property, we ran out of
4:03 money. So, it comes back to what do we
4:04 actually do, which I will share exactly
4:06 how we solve these problems and other
4:08 plays that we could have used after we
4:10 do one more unit. Oh this one's
4:12 really gross and also smells terrible.
4:14 This actually probably is not as bad as
4:16 the last one. This is supposed to be our
4:17 worst one, so sorry. Anticlimactic, but
4:20 still super nasty. Uh, no bed bugs, but
4:22 I see dead cockroaches. We did
4:24 exterminate those, but have yet to do
4:26 the part where we uh, you know,
4:27 remediate and clean out the actual unit.
4:30 So, this again will be made beautiful.
4:32 But yeah, I see roaches on the walls
4:34 that are still not fully dead. So, this
4:36 is also nasty. Every single one of these
4:38 units, though, look at those smoke
4:41 marks. I mean, this is just like the
4:43 grossest of gross. We've already ripped
4:45 out the entire bathroom. There was so
4:47 much mold in here. It was unbelievable.
4:49 Worst I've seen in my entire portfolio.
4:53 Uh, every other unit's completely
4:54 renovated and they actually look really
4:56 nice. In fact, if they weren't already
4:57 occupied, I'd try to show you a few of
4:59 those. I actually do have a nice one.
5:00 So, I want to show you what these will
5:01 look like when we're actually done
5:02 because it's way nicer when we do this,
5:04 right? What they look like when they're
5:05 turned. This one's almost done. We still
5:06 need to swap appliances and fixtures,
5:08 but this is what they look like almost
5:09 finished. You have nice flooring, simple
5:11 gray walls,
5:14 clean cabinets. Again, we're swapping
5:16 out the appliances, so ignore that. And
5:18 the light fixtures will be brand new. We
5:20 just pulled those out of the ceiling
5:21 today as we just finished painting. But
5:25 these are actually super cute efficiency
5:27 units. Again, the rent is only 750. This
5:29 is not a crazy high rent place. We just
5:31 want to provide nice places for people
5:33 to live. So, really simple. We're 90%
5:36 done with the rena of this one. But this
5:38 is what all those units will look like.
5:39 And it'll take us about 2 to 3 weeks to
5:41 get all of them looking exactly like the
5:42 one behind me. What do you do when you
5:44 actually run out of money? So, I'll tell
5:45 you what we did on this project
5:46 specifically. And then I'll tell you
5:47 what the other options would be. Uh, we
5:50 did the super boring one on this one is
5:52 we were done. We did the leasing first.
5:53 We got all the leases signed. So, I have
5:55 a final budget and a finished project
5:57 ready. We did the final math. There was
5:59 about $40,000 additional dollars that
6:00 were needed to completely turn all the
6:02 units, get everything ready, and to
6:04 fully lease the building. Now, with
6:05 that, we'll get the value of the
6:06 building to about $2.6 million, which is
6:08 awesome. We all contributed in
6:10 proportion to our equity. Caleb and I
6:12 own 40% of the building. The investor
6:13 owns 60%. [music] Now, there's a path
6:15 for that to change after refinance where
6:18 we actually get the majority share, but
6:19 for right now, we all contribute in
6:21 proportion to our equity. So, we got
6:23 together and we all agreed, hey, let's
6:24 just write the final check and finish
6:26 the project. However, if we didn't have
6:28 the money or we had an investor who's
6:30 not willing to, that's a pretty common
6:31 thing. You have a couple of options.
6:33 One, you can take on additional debt and
6:35 pledge it against the equity of the LLC.
6:37 So, instead of getting a second position
6:39 note, so like you have your bank note,
6:41 then behind the bank note, you put
6:43 another note. You can't always do that,
6:44 but sometimes you can easier without
6:47 doing a further incumbrance on the
6:49 property, you do a membership interest
6:51 pledge agreement. This is a simple
6:53 agreement that simply says that in the
6:55 event that we don't pay you, the
6:57 collateral is the actual entity itself
6:59 and my equity in this. So, we could have
7:01 raised some money and I could have
7:02 pledged, let's say, 50% of my 20% equity
7:06 of the LLC or Caleb could have done the
7:08 same or a combination of these. [music]
7:10 Now, in the event that we sell the LLC,
7:13 you put a bunch of clauses in there that
7:14 says, "Hey, we can't add or dilute this
7:16 LLC without this person signing off."
7:18 So, when you sign these, you're pretty
7:20 much locking the entity in its current
7:22 status. I cannot add or remove buildings
7:25 from that portfolio because I would
7:27 either increase or decrease the actual
7:29 value of the backing of the note.
7:31 However, the company itself, the LLC
7:33 that owns the property can pledge its
7:36 interest [music] as a note. Very common
7:38 way for people to knock these out.
7:39 Another thing you can do is a
7:40 partnership buyin or buyout. Let's say
7:42 the 60% partner did not want to write
7:44 his 60% check. I could offer him, hey,
7:47 if this project is no longer what we
7:49 originally planned and not what you want
7:50 to do. Could someone else buy in? We're
7:52 a lot farther than we were. The income's
7:54 higher. The value is up. There's actual
7:56 value in your current position. Would
7:58 you allow someone to buy in? That
8:00 individual buying in could come in with
8:02 X amount of capital to help renovate the
8:04 building and buy that individual out. In
8:06 fact, I did that on a project in Houston
8:08 and I've done that on a project in
8:09 Laredo, Texas, where there was a
8:12 material change to the project. It was
8:13 still a fundamentally good deal, but it
8:16 was going to take more cash from get to
8:17 A to B. We brought on investors and
8:19 built the team that was more appropriate
8:20 for that. So, you can reorganize your
8:22 LLC. You can take on additional debt. Or
8:25 you can do the boring thing that we all
8:26 did. You just wrote the final check and
8:27 now the project is almost done. We'll be
8:30 back in the field when it's completed.
8:32 But sometimes major things happen.
8:34 Sometimes you have more than the
8:36 predicted amount of move out. Sometimes
8:38 right after closing a building, you have
8:39 more ACs fail and a roof fail. There's
8:42 things that can happen that are beyond
8:45 what you would normally account for. You
8:46 just have to be able to pivot. This is
8:49 only possible when you have a good deal.
8:50 Fundamentally, buying 26 units in
8:53 Stevenville, Texas for $1.6 million with
8:56 the income it was bringing in is a
8:57 technically very good deal. So, we run
9:00 out of renovation money. We have all
9:01 sorts of options to restructure because
9:03 the equity is there in the project to
9:05 play with. If you do a deal where you
9:07 overpay for the deal and run out of
9:08 money, there is virtually no option.
9:10 People can't sell their equity. There's
9:12 no ability to take on additional debt.
9:14 Who wants to lend to a failing project?
9:17 If you do your deal right and it
9:19 materially changes partway through, like
9:20 our project did here, the pieces are
9:22 always solvable.