Indianapolis Project: Seeking Advice/Investor

[Evan Manship]

Help!

I purchased a 7,000 square foot, 4-unit multi-family home last September with the intent of utilizing a FHA 203k loan to rehab and lease the units while living in one of them for free. However, after a long story, I closed on the deal in cash using hard money and have been sitting on it ever since.

I am wanting to rehab this property and lease it out OR convert these units into condos and sell them all off individually.

My fear is that if I continue looking for an investor to partner with I may not find one and holding costs will add up and at the same time, utilizing a huge loan with huge PMI sounds very risky to me and I'd like to avoid it if I can. It's a true catch 22.

Details:

Purchase Price - $90,000

Current Market Value - $130,000

Square Feet - ~7,000

Units - 4 (separate entrances, basements, meters, etc.)

Rehab Needed -$250,000 (conservative)

Post Rehab Est. Monthly Rent - $3,600 ($4,800 once I move out)

Post Rehab Est. Annual Rent - $43,200 ($57,600 once I move out)

Annual NOI based on 50% rule = $28,800

Cap Rate = 8%

Est. Value based on income approach = $360,000

If sold as condos.....

Post Rehab Per Unit Sale Price - $125,000

I think this project if done correctly can provide very solid footing for my imminent plan of being a full time investor. I have been stressing about this project for months and I am in need of serious developer/investor/friendly advice. What do I do?

Get a mortgage? Pursue joint venture? Or just sell it all together? I want to move forward with other projects and this one particularly is taking up a lot of time and money. Help!

[Mike D'Arrigo]

I have to agree with @Chris L. I would bail. I see a number of problems and risks with this deal. First of all, you're assuming the market value is $360K based on the income approach. The problem is, appraisers don't use the income approach to value residential properties with 4 units or less. They will use the market approach which is tricky with MF in Indianapolis. You could find that your market value is less than you think. Another problem is that no one's going to line up to buy a MF with an 8% CAP rate. You said that the NOI is $28,800 using the 50% rule. Why at this point in the game are you still using the 50% rule? The 50% rule is fine for quickly figuring out if a deal makes sense, but before you move forward on anything, especially a somewhat risky deal like this, you should have a detailed pro forma of your income and expenses.