Build a better neighborhood or pipe dream?

Question

While investigating potential buy/hold properties in an area I'm moving to recently, I came across an interesting (to me anyway) property. It appears to be a portfolio sell-off of six rental properties. A six-unit apt builiding, a triplex, a duplex, and three SFHs. What's interesting is that they are all on the same block! Three on on-side and three on the back-side of those properties facing the next street over. The condition of the properties is absolutely horrendous. Not even sure they are all livable at the moment, I would actually guess they were not.

Further analysis reveals this is the most run-down block in the area and rehab have taken place on the surrounding blocks already. The current onwer must have cash-flowed the crap out of them and let them deteriorate into nothingness. Two hospitals, Walgreens, fire dept, school, and numerous DRs offices all with 3 or 4 blocks. All the buildings would need a complete rehab, I've no inspections done, just going by what I can see. I don't have any rehab experience, but I can plainly see these buildings are trashed and old (1930s and 40s construction)

The quick question is this: How much better of an investment would this be since it's the opportunity to rehab "THE" worst block in an area, or does that not influence the analysis at all? This would never be a high-end area, but I think I could highhandedly transform it into a better area. It's such a big idea to me to wrap my numbers around, I really could use help on this. I know you should estimate rehab costs before you buy to establish an offer, but what about working the equation backwards? Basically, running all my numbers like this:

CAP based off of rents I could get if the properties were rehabbed= 10 CAP 420k or 8 CAP 500k

.65 ARV= 273k and 325k

Asking price 165k

If they accept an offer of 140k, could a total rehab be done with say... 140k?

Patrick L. · Answer

I just finished a rehab where I know I had a positive impact on the neighborhood. I bought a 4 unit property on a block that a lot of people consider to be pretty rough. It was boarded up with homeless sleeping in the yard and now it's pretty much the nicest house on the block. The block has some rough elements but also has a lot of owner occupants that have been in their houses for 40 years. I had a lot of people from the city and just neighbors in general come by to comment on how great the house was looking and that they were so glad to see improvements being made in that area. We worked on the house for a couple months and never had any issues with the neighborhood (not so much as a stolen tool or broken window). The best part for me and the reason I bought it are still the numbers. I paid $28k for 4 units, put another $30k into my rehab so I'm all in for $58k. I was able to rent all 4 units in less than a week to above average carefully screen tenants at $550/each. One of the units even went back to a woman who had lived in it for 10 years until the previous owner fell into foreclosure and the bank gave her notice and made her leave (she didn't have a current lease). I'm paying the water/sewer/trash (only one meter per property here) so that'll run me $150-$200. At $200 I'm still grossing $2,000/month and if you figure 50% for expenses then it's a 20 CAP. and I did something really positive for that neighborhood. These areas have a ton of permanent renters if you can offer a product nicer than anything else in the area for just a little bit more you can have your pick of tenants (I had over 20 applications in a week). The finished product (front building, there's a second 2 unit building behind this one). I'm on the look out for some more properties near by while the prices are still cheap.

Liam Goble · Answer

@Zachary Lowe I generally ask my Realtor to do a semi-quick comp search before I set out on a purchase. Zillow and Trulia seem to focus on SFH purchases. I'm not sure of any website that has info about small multis. Sometimes I only have the luxury of having one local comp. It's not much, but sometimes its enough.

Zachary Lowe · Answer

@Liam Goble Comps are giving me a hard time to establish. Places like Zillow and Trulia are showing no activity recently in the area either sold or listed. I'll keep working on it though. I know tax appraisals aren't a good judge of market value, so maybe I'll be able to come up with something here soon. I just need to figure out a realistic ARV to move forward. Thanks for your thoughts! More possibilities to consider!

Liam Goble · Answer

@Zachary Lowe from what I learned with my process is that while we (as investors) may value a property based on the cash flow, banks will value ANY property that has 4 or less units and no commercial spaces based on the recent comps. If there are any commercial spaces, or 5+ rental units, then the building gets valued on the NOI. Can all of the properties be combined onto one deed? That would obviously complicate the exit strategy many years in the future though.

Zachary Lowe · Answer

@Justin Polston and @Patrick L. Thank you both for your stories and encouragement. Justin, I think my biggest snag right now is my exit strategy due to confusion as to how the properties would be valued. Patrick, I think I can talk my seller down from his asking price, but still couldn't get the deal you got, congratulations! I know the area residents are very grateful for your willingness to see an upside to their community. On another note: I don't think I can satisfy this project without a viable exit strategy. In light of that, if there is anyone here on BP who wishes to see my numbers and these properties as a prospective hard money or private money lender on this deal, please feel free to contact me. Maybe between your experience and my investigations we can nail down a solid ARV regardless of how the appraisal situation may go.

Justin Polston · Answer

@Zachary Lowe What you're asking CAN be done - I saw it happen! When I went to school at IUB, there was a stretch of a street on either side that was everything but demolished on either side. 1 owner for all of it (and this may have been a possible city project) but a LOT of houses were redone and redesigned in similar fashion of each other and I know the values went up (worst block in an area of better blocks). It was a really interesting thing to watch happen over the course of a few years. I would like to think there's a potential monopoly situation here. If your potential properties really are in the worst part of a great area, all of the values, including yours, should go up in value! As to how much, hard to say...

Zachary Lowe · Answer

@Liam Goble Thank you for your reply. I am curious as to how your property was appraised versus other possible ways. Would it be unwise to assume that since whole block is owned by me and all rental it, would be looked at and appraised based off of the NOI as a commercial property? This is how I would like it to be appraised since it has the six-unit building on the same property. Basically have it appraised based off it's income generation as a unit rather than what the houses are individually valued.

Liam Goble · Answer

I just finished a complete gut rehab on half of a duplex, which was in similar condition to what you describe. It needed wiring update, subfloors removed and replaced, new flooring, new bathroom, new kitchen, trash/pet waste/people waste/etc removed. I put $15k into the place and about 500 hours of my time. At 6mos later, the property appraised at only +$10k from my purchase. I would be upset if the property didn't cash flow as well as it does ($390/month for a cash on cash return of about 21% AFTER the rehab). If I had subbed out the work, I would have spent approximately $14k additional (400 hours @ $35/hr; assuming some efficiency gains from subs who specialize). All in all, I gained valuable experience, showed my Realtor what I am willing to tackle, learned what I like to do vs hate doing, etc. If I was living on my cash flow from rentals, I would continue to purchase these UFUOs (Unique Fixer Upper Opportunities), fix them and rent them. Good luck.