What could go wrong?

[Roselynn Lewis]

Say, I purchase a small distressed apartment complex for 500k that is valued at 600k. I renovate the apartment using an equity line (Is this a good idea, in terms of the source of funds?) My goal is to renovate the apartment and get it to 100% occupancy and sell it. What could go wrong with this transaction? What are the hidden costs? Assuming it takes me six months to turn it around, what sort of return would I be looking at? Or what factors would determine my return? What other strategy could I employ? How do I mitigate what could go wrong? Any thoughts welcome.

[Frank Gallinelli]

You've received some excellent advice here -- just want to underscore what has been implied in several of the comments:

Discard the idea that the property is "valued at 600k" and think about finding a purchase price that will allow you to earn an acceptable profit. Start with a realistic estimate of the property's value after it is repaired and rented: Gross potential income, minues allowance for vacancy and credit loss, minus operating expenses to give you the NOI. Find out what is a conservative cap rate for apartment buildings in your area and apply that to the NOI for your estimate of value after repair

Then make a realistic estimate of what it costs you to get the building to the point where it is re-habbed and at stabilized occupancy. Don't forget to include all of your carrying costs while working on the actual construction (real estate taxes, insurance, electricity, leasing commissions, debt service, etc.). This is the total you have into the deal, not counting the purchase price.

What the property is ultimately worth (per cap rate and NOI), minus your total costs above is the most you could pay for the property just to break even. Of course, breaking even is not what you want to do, so --as in the post before last -- to achieve a desired profit of $X you have to purchase the property at $X less than this break-even amount.