16 unit multifamily feedback

[Dominique Mitchell]

Hello All.

I currently came across a 16 unit apartment building that needs ALOT of work. It will be a full gut rehab, my contractor is thinking around 300k-400k. The current sale price 65k. The building ranges from 1bed to 4bed. Average rents in the area are about 500 to 800 a month.

I am a new investor and want to know first should I listen to none investors when they say don’t bother with it?

Gross rent multiplier, if I understand it right could give me pretty good value on the building.

As far as financing I want to use a USDA loan, this is a rural area property. So it should qualify.

Or would a hard money lender be a better option?

I have a lot of questions, I’m just looking to get pointed in the right direction to start

Thank you all in advance.

[Todd Pultz]

@Dominique Mitchell I have a completely different opinion on the hard money lender. We use them often and frequently and on full rehabs, but only if we can have rent ready in under 6 months. If that’s the case we can get fully rented in less than 2 months and be able to refi out at 9-10 months.

Our hard money guys will do 90% LTP and 100% rehab cost. They put rehab in escrow until we take out.

In your scenario I do not know how many of what unit you have and what market rent is, but I think your numbers are low no matter what. So check your Fair Market Rents. However, for sake of debate I took the average of 800 and 500 which is 650. I used that as the rent across 16 units to get your annual gross. Then we account for 10% vacancy and considering the property is fully rehabbed, 35% expenses should be more than enough leaving you with roughly $73,000 NOI. Using a 10cap we would value your property at around $730,000. Now if you refi at 75% you would be able to pull out $547,000 or somewhere around there and take out your $465,000 all in number. Thus having 0 cash in the deal and pocketing 70-80k for reserves or to use on another property.

Remember, your 465k all in, and net operating income is 73k, so your operating around 15-16cap, which is pretty darn good.

I would do this deal all day long, but you better be sure on the numbers and have the crews ready to roll. If it needs full gut, I would ensure it still meets zoning. A lot of buildings sit vacant for awhile in a zone that was changed at some point to residential zone not allowing high density multi-family. Due to the long vacancy the lose their non-conforming condition and you have to file appeals in attempts to get it, so double check this before you jump down the hole.