20 Unit Complex - All Vacant - Offer?

[Jason James]

Ok so I have a lead on a 20 unit complex. All units are 2 bedroom 1 bath units. All unitswill need a complete rehab. All units are vacant.The exterior of the building is in good shape and will need very little work. I have a very good handle on the SFR rental market in this area but I am not sure how well this particular area does for multifamily. Also there are a couple newer complexes in the area. The newer complexes are nice and rent for between $715 - $800. I feel I can charge $500 - $550 for these units after they are completely rehabbed, maybe more. Once they are completed and fully rented I will be self-managing the building so no PM fees.

I understand the rehab will take some time and I am very experienced in rehab work as I have done many SFR flips. I estimate it will take roughly $240k - $280k to rehab the entire project. I will be using personal funds for the rehab and in the end doing a cash out refi.

First question is would I rehab a few units and start renting them out in phases or would I attempt to get the entire project completed and then rent the units? Of course I could advertise and take applications while under construction.

Second question is how would you determine your absolute best offer price on a building that is 100% vacant, with competing units in the area that are newer and have much more curb appeal?

One consideration is that the seller has expressed that he would do owner financing until the project is rehabbed so that I can approach banks for financing,

Just looking for thoughts on this one.

Thanks 

[Travis Lloyd]

Aha! We have come across one of the many instances where cap rates fail to be of use!

Congratulations on finding an empty building. Let me say that one of the groups I worked with only purchased vacant buildings, or if we got a building with tenants, evicted every single one before so much as sweeping a floor let alone renovations. These have huge potential. Cap rates are useless, the owner is literally not receiving a single dollar, and you can pick them up for a great price!

DO NOT do yourself the disservice of purchasing a beautifully empty building and not completing the following items. I beg you.

All new plumbing risers and laterals

All new windows, doors

All new furnaces, ductwork, everything related to heating

All new electrical

New Roof

I would strip everything to the studs, keep existing sub flooring if you can (you can lay 3/4" plywood and shim to level if they're off), and rebuild from there. You may spend a little bit more now, but you will have a 100% maintenance free building for at least 10 years (and 20 on the bigger stuff).

Then sit back and let the cash roll in. Others need to set aside significant amounts of management reserve, which you still should do, but you won't need to set aside as much and you won't have to use it!

As far as pricing a vacant building, you look at price PER DOOR. We're working on a property in Lexington now. Buildings trade at 40-50k per door renovated and occupied (c+ ish), and buildings in sh*t shape trade at 12-15 per door (although that's been creeping up lately as supply has dwindled in Lex). If you can get closer to 12, its a home run. 15 will work though (again, these are Lex numbers; I don't know Louisville).

If you spend 12k per door to purchase, renovate each unit for 15-20k, plus another 5k per unit for common areas (roof, front entry, repointing brick exteriors, etc), then you're all in for roughly 35k per door. The property rented and cash flowing at or above market will push your sale price to the higher end at 50k per door, and you've just cleared 15k per door. Keep it for a few years to enjoy the cash flows, and you can increase that profit by significant amount!

Good luck! Great find!