Repair cost for Loan is too expensive.

[Michael Taylor]

Purchasing 5 unit for $260K in Chicago on the southside.  The building is in great shape, particularly the common areas, basement, boiler, roof, exterior, electrical, and 3 car garage.  I was disappointed that the interior of the units are the original 1930's flooring and sinks.  The stuff maybe old, but everything works.  The improvements needed are simple cosmetic, sand floor, some new vinyl flooring here and there, paint, kitchen and bathroom upgrades, and new appliances.  I have a good team, so I should be able to upgrade the interior on a migratory plan as tenants move out for about $8,000 each.  So I need about $40,000 for rehab.  

The question is; do I take the loan with the rehab money that is interest only for one year then refinance after rehab, or take the purchase only loan at 30 years fix rate and rehab out of pocket?  The fees, points, higher interest, etc.  will cost me thousands of dollars.  It is much cheaper to go to a loan shark (plenty of companies offering me money) that would be much cheaper.  This way I don't have to refinance (pay twice for fees, closing points, appraisal, etc.), so I have to go for the purchase only.  If the building was vacant and I needed to perform the rehab all at once, that would be one thing, but I can upgrade each unit as tenants move out.  What are your thoughts?

[Crystal Smith]

It sounds like you've answered your own question in the post & want to rehab out of pocket. Whether rehabbing out of pocket or not we would get copies of all the leases during the contract due diligence period. If we found that the majority of the leases are month to month we would plan on sending the tenants a letter terminating the month to month lease and giving them a move out notice. (We'd also offer them assistance in finding a new place). With that plan in mind we'd then use a loan for the renovation. 

If we found that the majority of the leases are not month to month we'd pass on the deal if the property didn't come close to meeting our cash flow requirements.