Today’s investment story comes from Shantanu Kamra. Shantanu moved to the United States 8 years ago and Chicagoland just 2 years ago, and he’s been able to scale his portfolio in the western suburbs to over 40 units. Shan is an IT executive and has been able to scale his portfolio along with the full-time career. He leverages his background in big data to identify emerging submarkets and his project management skills to manage the rehabs. He was given the “Investor of the year” award by National RE Invest in October 2020 and featured on the Straight Up Chicago Investor podcast in November 2020.
Shan loves to help busy professionals invest in real estate without being a landlord and collect income 100% passively. He is a big advocate for how to stop working for money and how to make the money work for you. This investment story is a bit different from the prior ones, as it focuses more on the conceptual, big-picture side of real estate (with an example to boot), rather than the detailed nuts and bolts of a specific deal gone bad.
Pre-close
The main topic discussed in this post is related to private lending in suburban multifamily buildings. Typically, private lenders have only focused on single family properties, in which they use a relatively higher-risk buy, rehab, rent, refinance (BRRRR) strategy to recycle their money after each deal. The nature of this higher risk reveals itself in a few forms - first, the property is often in a weakened, deteriorated state when it is first purchased. On top of this, there is absolutely no cashflow coming in, which increases the penalty of holding costs and waiting time. These types of properties often need much work before they’re able to provide any cash flow. Once the project is completed, the after-repair value (ARV) is mostly speculative, since the value of single family houses can change based on the general market and the comparative sales approach used for single family appraisals.
Contrast this with the benefits of multifamily apartment buildings. First, when you purchase a building that is 2+ units, they are often already occupied to some degree. This reduces the investor’s risk, and allows one to still implement the BRRRR strategy on specific units or the common areas, but without the penalty of zero occupancy and cashflow during the rehab. This results in less headache and risk for both the investor and private lenders. Furthermore, the value of the final product after all improvements is much more predictable. As opposed to the comparative sales approach used for valuing single families (which is mostly determined by many homeowners who specutivaly buy their primary residence based on the price that other, similar properties are selling for), the ARV of multifamily apartment buildings is determined based on the net operating income (NOI) of the property. This means that by making various improvements, renting out vacant units, and boosting rents, investors can much more reliably predict the impact of improvements on the ARV.
To add to the benefits of multifamily buildings, these types of investments are typically recession and pandemic-resistant (the coronavirus is a good example of this). The current trend is that people are more open to renting because it is less work and requires less up-front cash. This means that apartment buildings will be a valuable safe-haven for many private lenders and investors to park their money and receive a solid return. If desired, the general partner (active) investor can simply act as a passthrough-entity for investors - this means finding, funding, and executing the deal, but without putting any money of their own into the project.
Execution
Shantanu demonstrates the benefits of suburban multifamily investing through a particular property purchased in Maywood on the west side of Chicago. He found the 3-flat through a short sale for $140k. Shantanu expected it to be a relatively large rehab, and that proved to be true. He funded the deal using private lending, which often allows for flexibility in the terms of the loan. The end-goal was to make the property a buy-and-hold investment, while refinancing out the extra equity to cash-out the private lenders.
This biggest hurdle in this particular investment was the requirements imposed on him from the city. Shantanu had to change all the doors to be fire-rated doors - something that turned out to be a large expense. On top of that, the city required him to change all the windows as well. As these items weren’t pointed out to him during a pre-sale inspection, Shantanu did not specifically budget for them in the pro-forma financial analysis. Since the city knew he was rehabbing the property, they expected him to do more than someone who already had an existing structure in place, and who wasn’t planning to make any major changes.
Final Result
When all was said and done, Shantanu ended up putting in 90k into the rehab for an ARV of 300k. Given an all-in acquisition cost of 230k, he was able to earn a profit of 70k and cashout the investors who lent to him on the project. All three units of the property are fully rehabbed, he was able to double rents, and the property now brings in $2,400 each month after all expenses. The project went relatively to plan - he purchased it in March 2020, finished the rehab in August, rented it out in September, and refinanced in October.
Shantanu’s biggest takeaways from the project were related to the impact of multifamily investing. The rehab was close to the same amount of work that would have been required on a large single family property, but the returns were much higher.
Shantanu is now interested in doing something similar on a larger property, such as a 12-unit in a more stable suburb. This would require the support of investors who are open to lending on larger projects. Some of his areas of interest are Bolingbrook, Romeoville, and Joliet.
Lessons Learned
Multifamily investing offers a plethora of benefits over single families based on one’s personal preferences.
Expect the unexpected, and have a contingency budget for “unexpected” expenses. Understand your city requirements as much as possible, and seek to obtain all the information you can from them prior to closing and especially prior to breaking ground on a rehab.
Despite the noise in the media, there are opportunities everywhere in Chicago. It often helps to work with an experienced investor if you’re looking in B or C class areas.
Look into getting some kind of mentor. Whether formal or informal, it always helps to have someone with you to help avoid large mistakes and to point out areas of potential improvement.
Shout outs
Andrew Holmes, President of National RE Invest and Chicago REIA
How to best contact Shantanu
To learn how you can get secured passive income please email Shan at “chicagoapartmentinvestor@gmail.com”. His cellphone is: 847.644.0262.
Also, check out Shantanu’s podcast episode where he shares his journey scaling his portfolio in the western suburbs to over 40 units. He also talks about househacking, BRRRR strategy execution, and scaling into larger buildings.