Some of our clients and readers have been inspired by an extreme makeover on HGTV to renovate a home – and a few even made money doing it. Recently we’ve gotten more requests from a number of folks looking to get started in the fix and flip business, so we decided to ask the experts what it’s really like.
We had the pleasure of sitting down with Garrett Hogan and Max Taylor of OnPoint Capital to get a closer look at a multifamily property that they’ve converted to three condominiums. It’s rare to get an inside peek into the specifics of the conversion process; we covered everything from finding the property, construction, exit, and even benefits to their community.
*Please note their responses reflect their own views and preferences, and not those of RD Advisors.[1]*
RD Advisors: Let’s start with the basics. How did you both get into real estate?
Max: I was in software sales for many years, but I knew that I wanted to be part of something a little more tangible. I always had an interest in getting into real estate. I was doing investing on the side with my full-time job and then about four years ago or so I transitioned away from sales into doing investing in real estate full-time. That’s where I met Garrett. He was doing project management for another development company. I got hired there, and the two of us started working really well together and pretty quickly realized that we’d be able to spin off on our own and do our own thing.
Garrett:I’ve been doing this now for about ten years, give or take. I actually started in the real estate space back when I was in college. I was a leasing agent over the weekends at a large apartment community. I realized then that I really enjoyed the real estate world. I then got my license, and took kind of the usual path there. Upon graduation, there was an opportunity to work for the same real estate development company on one of their larger development projects close to where I went to college. I joined on as a development manager and at that point I got a good taste of the entire process from both a sales perspective as well as a construction perspective. I did that for a few years, but I’ve always kind of been entrepreneurial and knew that I wanted to have my own business and not work at a traditional job. So I moved to Boston in 2013, linked up with an investor, and started doing flips and condo conversions in the Boston area. Fast forward a couple of years, I met Max, and we started OnPoint Capital and just started doing it together for the last couple years.
RD Advisors: How did you find the subject property?
OnPoint Capital: We were looking in Dorchester for a while. Specifically, we drew a half mile radius along every single red line stop, figuring that there would always be demand for being relatively close to public transit.
A friend of ours, who is also an investor, gave us a call and said hey I have a deal that a wholesaler brought to me, a 3-family. At the time we were seeing three families sell for just obscene prices that wouldn’t have made sense to condo and wouldn’t have made sense to hold on to. Just people doing a lot of speculation or money parking or whatever the case may be, but the numbers just weren’t working. [This property] was one of the first ones where the numbers actually did work. It was marketed to us at $775,000 and we ended up getting it at $750,000, but it was such that we could make three mid to entry level condos work really well within a tennis ball throw of the Ashmont T stop.
RD Advisors: How did you know there was value there? What things do you look for?
OnPoint Capital: We have a checklist that we use; we look at mechanical, utilities, age of systems, that kind of thing. But really, what drew us more to this property was the existing floor plan. It’s laid out really well and it was clear to us that it was something we could go in and don’t necessarily need to gut it or completely start from scratch.
A lot of times with these three families, especially in some of the other neighborhoods here, it’s just a bunch of chopped up little rooms, where they tried to maximize bedrooms, and we find that kitchens are small and they only have a single bathroom. With this one, we were able to divide or subdivide a bedroom off the kitchen and open up a wall between the kitchen and the living room. No structural [changes] but makes a really good expansive living space.
The other thing that worked really well was that we had a large closet off of the front rooms of the building, which we ultimately turned into a master bathroom. We were able to stack the plumbing for the bathrooms on top of each other. It worked out well that we were able to replace all the mechanical components – the heating system, the electrical, but really not deviate much from where it started. It really helped make things a lot easier to do.
RD Advisors: Nice! How did you approach the financing component?
OnPoint Capital: This is one where working a private lender was the way to go from the onset. There was a timeline on the closing date that we really had to hit in order for it to make sense for the sellers. Because it was a wholesale agreement, we didn’t have as much traditional flexibility on asking for a closing date of our choosing.
In that kind of situation, working with a private lender makes a lot of sense because they simply can move faster than a traditional lender. For the debt side of the project, that was a clear route to go.
For the equity side, we raised capital from private investors who are looking to make a passive return on their money. We have a group of four to five private investors that would come in and essentially fund the down payment as well as some of the holding costs throughout the project, plus a little extra wiggle room. That allows us to scale and work with other people’s money to create value for the investors as well as the property.
RD Advisors: Wow, that’s a lot of work.
OnPoint Capital: Yes, that’s why you have to have a partner. You can’t do all this yourself.
RD Advisors: OK, now let’s walk through the renovation process. Were there any surprises along the way?
OnPoint Capital: There wasn’t anything catastrophic that we found that we weren’t necessarily prepared for. One thing that we did find is the owner’s unit on the third floor. The previous owner had renovated maybe 5-10 years prior and it was in pretty good shape, so we thought there would be all new wiring. What we actually discovered upon demolition is that a lot of the wires had been chewed through by rodents. So we ended up having to completely rewire that unit, and subsequently the other units below. It was something we thought we were getting a freebie on and it turned out that we weren’t.
A lot of this is behind the walls. Any time we make a budget on something, we assess what we think it’s going to cost, and then we traditionally add a bit of a buffer there, especially for larger items, such as mechanicals.
RD Advisors: Were there any delays through the course of the project?
OnPoint Capital: Nothing really out of the ordinary. Just getting schedules to line up isn’t as easy as it used to be a couple years ago. Everyone is so busy nowadays in Boston. [Subcontractors] aren’t really hungry for work anymore, so you really have to be on top of everything and be a good manager and foresee two weeks ahead as opposed to what’s going to happen next. Aside from that, I wouldn’t say there was anything out of the ordinary. With anything, working with municipalities typically takes longer than it should, which is from a paperwork, permitting, and inspection standpoint.
RD Advisors: How did you fare vs. the original budget?
OnPoint Capital: Well, we went way over it, but not totally. It was interesting. We had two separate budgets going into the project. One was assuming that we can sell the condos without adding a bathroom. That was the budget we went in with.
But after looking at some comparable properties that sold pretty soon after we bought the project, we realized that spending a little bit more and adding the bathrooms would actually pay us back. We then transitioned to a higher-end budget and went for that to create a slightly higher-end finished product.
Once we discovered we had to rewire the property and add the heating systems, it just made sense to go a little bit further than we were planning to go. We went into the project knowing there were two different routes to go on, and we weren’t sure exactly which route we were going to go in till we opened up the walls, and then made some decisions based on comparable properties that were for sale at the time.
RD Advisors: Ah, so how did you obtain the additional financing you needed?
OnPoint Capital: Originally, we sent our lender the lower of the two budgets for the debt side, and simultaneously from the onset raised more capital than we knew we were going to need for that lower budget, so if we went with the higher budget, we could have done that.
Going forward I think we probably would have given the higher budget to the debt side, but it just wasn’t clear at the time which route we were going to go. And we were kind of under the gun in terms of getting it done. We also had a lot of interest on the private money side to get into the deal, and we didn’t really want to turn people away so it made sense to take a little bit more there and leave the debt side the way it was.
RD Advisors: How long did the project take from start to finish?
OnPoint Capital: Approximately eight months. Construction was six to seven months, and it was another one and a half to two months to close everything out. We got two apartments under agreement very quickly after the project was complete. But you know, typically [for] first time home buyers there’s a 45-day close cycle so we had to wait a little while. So I think the total end-to-end was just a little over 12 months. When possible, we try to purposely return money after 12 months to our private investors so that they’re not hit with short-term capital gains. There’s really no benefit to getting your money back in 11 months, you’re way better off getting it back in 12 months and a day.
RD Advisors: So what was your ultimate exit strategy?
OnPoint Capital: Certainly when we’re looking at a project, we want to have multiple exit strategies. The three that would have been on the table in this particular case would have been (1) three separate condos – which was our first choice and how we ended up exiting, (2) to build it out, rent it back out, and hang onto it, or (3) build it, rent it out, and then sell it to another investor.
We try to have at least two or three different exit strategies, all three of which would pencil even if not very well. At least we would have some other exit option if condos for whatever reason weren’t selling. But for this particular market, we were pretty confident that condos were going to be the right way to go. That’s part of why we added the master bathrooms, the third bedrooms, and designed it for condo living.
RD Advisors: Anything else you’d like to add?
OnPoint Capital: The project went well. I think project management aspect of it helps us keep a lot of control over the unknowns. There’s always going to be curve balls in this style of business, but we like the fact that we’re able to control as much of it as we can by doing our own in house project management.
RD Advisors: What other projects are you working on?
OnPoint Capital: We’ve actually have a couple really exciting projects, ones that we’ve been working on for awhile taking through that zoning and approval process. We just broke ground on two larger projects that we’re super excited about.
One is an eight-unit condo project in Chelsea, which is a new market for us. It’s a market that’s shown really good growth year over year, that we’re really excited to tap and see how it goes. We would definitely like to do more deals there.
The second one is a nine-unit – another ground-up construction project in East Boston, a market that we’re very familiar with and have done multiple projects in. This one is particularly interesting because it’s boutique size; it’s going to have indoor garage parking and an elevator. It’s got a lot of things that larger-scale buildings have, but on a smaller scale in a more intimate setting.
The last one we have going on is a 4-unit project in South Boston which is a cool project. It’s one of the original homes in South Boston built in the late 1800s – a really large scale three family with a carriage house in the back where they used to store the hay for horses. We’re turning that carriage house into a fourth unit, which was a process going through zoning but it’s going to end up being a great project with pretty high end luxury condos in a great location in South Boston.
Around here in Boston we’ve developed some really great relationships with a lot of different people involved in the industry from private lenders to other developers to agents. We have those connections and know the market really well, so we get a lot of deals thrown our way. Having boots on the ground is critical to finding the really good deals that are out there.
RD Advisors: This was incredibly invaluable; thank you so much for your time today. We can’t wait to see the finished product of your current projects!
Follow OnPoint Capital on Instagram to see them at work. They share every step of the process, from breaking ground to the staged finish.
As always, if you have any questions, reach out to us on Telegram and someone from our team will be happy to help.
Additionally, we are currently accepting offers to invest in our fund, RD Real Estate Debt Fund II LP; details available on our offering page on the CrowdStreet marketplace. Please e-mail us at contact@rdadvisorsre.com with any questions or for more information.
[1] OnPoint Capital is a client of RD Advisors, but is not otherwise affiliated with RD Advisors, nor has RD Advisors offered any separate compensation to OnPoint Capital in exchange for their views.