15 unit + Full Rehab | 60% ARV financing options?

Question

Just wanted to share this off-market 15-unit apartment complex deal and get some more ideas.

Would like to conjure up ideas on how to get this deal funded with short term financing.

My initial thoughts: Property is not pretty, needs a lot of work, has no occupancy, and only 15 units. Reason I am interested is the ability to unlock $200K in equity in less than a year with a strong construction / management team, and a very high demand rental market. Strong market to hold an apartment complex asset.

Goal/Mission: Rehab with a strong local GC (I would be on-site during the construction) on a 90-120 day timeline, refinance, hold long-term or sell for equity. The numbers are showing a conservative $250-300K in gross equity at a 9 CAP after filling up at $800/unit

Details on the North TX apartment complex:

Price: $240K (16K/door) Rehab: $200K  ($15K/door). Every unit needs full rehab. Needs new roof.Units: 15

ARV: $750-850K at $800/moArea: CMarket occupancy: 92%Built: 1960s (90% brick/10% wood) Individually metered.

ARV with repairs: 60% Owner is retired and out of state. Free and clear. Will not carry any financing. Occupancy: 0% (vacant for less than 10 months)

Market: Most of the apartments in the area are getting repositioned. There's a lot of new construction 3 miles north of this property. 1 bd are starting at $1000/mo. I ran test ads and get at least 30-50 responses a week for $800/mo, it's a hot rental market. This would be a solid C-class property in a C area. There is a B-class property less than 1 mile of this property with 100% occupancy.

1. What would should we consider for financing? What type of financing should be our criteria.

2. Any other creative ways of getting this deal done?

Swat Khan · Answer

@Philip Bashaw:

Good point about getting the lowest number.

I think at this point in the negotiation, he's being quite firm on his price. Since he hasn't really budged on his price, I would have to come back with something convincing. Maybe a contractor bid  or offering to close quicker. I will think about how to tackle that moving forward.

The numbers start to look really good if we were to buy it at $160K.

Gilbert Dominguez · Answer

Ok, thank you. Now if you have a super GC with a good record and can provide you with a list of his or her past projects, hopefully they are the same size of projects with the same scope of work. Try GCA financial in Campbell, California. They may be a good fit for you and get your deal done. You can look them up on the internet.

Now if you should consider a project manager or a construction superintendent to over see this project you feel free to PM me and I will see what I can do.

Swat Khan · Answer

@Gilbert Dominguez

1. S: I am with you and much rather prefer to be conservative and run the numbers low. I've had inspections and contractor bids. Would like to get more feedback on the numbers provided below.

How did you come up with your repair figure of $200K. Granted that comps would be useful for the ARV

2. The quotes for rehab are from  $160K to $320K (the $320K contractor literally said he padded his numbers by 30-40% because he wasn't able to get into all of the units, some of the units doors were locked).

3. If we go by the higher quote, it would be $320K rehab + $220K purchase price = $540K ALL-IN / $750k ARV = 72% LTV including rehab

4. Rehab per sft @200K$200,000 REHAB / 8080 sft building = $25 per sft

5. Rehab per sft @320K

$320,000 REHAB / 8080 sft building = $39 per sft

Note: Our last full blown rehabs were $18-24 per sft range.

but exactly how did you determine that the ARV would be between $750K and $800K?

6. Based on net income. Proforma NOI per month:

$800 x 15 x 90% occupancy x 50% expense ratio = $5,400 / mo NET

NOI x 12 months = $64,800

7. CAP valuation

9 CAP = 720,000

8 CAP = 810,000

Note: The median rents are over $1000 in the city (a top growth rental market in TX), we will be targeting the affordable C housing demographic for quick fill up, predominantly spanish speaking renters as seen by the B property just north of this property.

I am thinking you may be grossly underestimating the repair cost and to use a time line of between 90 days and 120 days seems awful short to me to get that much work done on 15 individual units plus the work that need to be done generally on the entire building. Are you quoting figures and timelines provided to you but GC's?

8. The numbers were quoted by GC. It is 8080 sft., which means it's a smaller building with 1 bd 1 ba. I would determine it to be an 4-8 month rehab to be conservative.

In terms of the timeline for the loan, it would need to be at least 12 month loan at its shortest, and 36 month loan if we were refinancing to season the  note and allow time for bank to refinance.

Please answer these questions for me and I will go from there. I can even guide you to the proper financing.

9. Thank you for your input. I hope I was able to answer your questions above.

Ben Leybovich · Answer

I think this is a dangerous deal - not impossible, but dangerous. You mention that most apartments in the location are being re-positioned; I don't like that. I also don't like that there's a lot of new construction close by; this is your competition, and guess who wins... Finally, what you want is this type of deal in a Class B area - this is Class C,a dn guess what - you can't manage C Class tenants without a substantial economic loss number. Thus, while physical occupancy may be high, economic will be much lower. And coupled with the notion that you may be too high on the rents and too low on the rehab, this is dangerous...

Current owner is not an idiot - why do you think that you can do better?

Be careful and do your research.

Gilbert Dominguez · Answer

How did you come up with your repair figure of $200K. Granted that comps would be useful for the ARV but exactly how did you determine that the ARV would be between $750K and $800K?

I am thinking you may be grossly underestimating the repair cost and to use a time line of between 90 days and 120 days seems awful short to me to get that much work done on 15 individual units plus the work that need to be done generally on the entire building. Are you quoting figures and timelines provided to you but GC's?

Please answer these questions for me and I will go from there. I can even guide you to the proper financing.

Philip Bashaw · Answer

Swat,

I'd love to see the more experienced investors comment on this because I think it would be good to get their take on it. Its obvious that the seller doesn't want it anymore and personally, I'd be looking for the best possible price and asking him what he really wants for it, what was he planning to do with the money and so on...I'd push to the point of pissing him him off.

A successful, local wholesaler here told me that when your offer makes you uncomfortable, that's a good offer or the offer you should make on the property. I'm very interested in this because I'm looking to start making offers very soon in my area on small apartment buildings.

Phil