15 unit apartment renovation, financing options?

Question

I love reading posts on here but rarely have cause to write, hoping to enlist some of the excellent experience out there!

I've got a 15 unit apartment complex in central Indiana. Currently have it on a 3 year carry w the seller. It's a mix of 3 bed (8) and 1-2 bed (7) units, came 75% occupied and with a lot of deferred maintenance. I'd originally thought to fund the renovations (ballpark 135k) out of pocket but we just finished the exterior and I'm now considering financing options. Any thoughts on lenders/loan programs?

It's grossing about 5k right now, operating income about 3k. Post rehab, gross about 9k.

Jay Helms · Answer

@Andy Schwaderer - how did you find this apt building and any tips on convincing the seller to carry?

Andy Schwaderer · Answer

Thanks guys, I think the answer is to go with the original answer which is to pursue financing after renovations are completed and the property is leased at improved rents.

Tom Mole · Answer

@Bob Bowling, so true! Andy isn't giving us the NOI, cap rate or purchase price, so we're just swinging in the wind as far as valuation is concerned. No one would finance against collateral that cannot be evaluated, wouldn't you agree??

So, @Andy Schwaderer, what is your purchase price? What is your current gross income less expenses, not including your payment to the seller? What is the capitalization rate for similar apartments in your area? How much of the purchase did the seller carry and what does he charge you for this loan?

Bob and I would like to help, but we need some more details. Thanks.

Cheers!!

Account Closed · Answer

In what market is someone paying $1,080,000 for a $360,000 property?

I got someone on another thread claiming he is buying $2,000,000 properties for $300,000!

Maybe there is a yuge misunderstanding of what market value is.

Tom Mole · Answer

Hi @Bob Bowling,

What I was getting at here is if you're NOI is $3k/month and that represents 9% cap in a 9% market, then things are about where they should be and your purchase price is about $360k (in this example). However, if your NOI represents 3% cap in a 9% market, then you paid way too much and you may well be underwater, even if you could afford the cost of money. The risk is not covered by protective equity, so a lender would have to "just take your word for it" that you'd repay the loan. Scary!

I just don't have enough of @Andy Schwaderer's numbers to make an informed decision. My left pocket won't even lend to my right pocket without clear and complete numbers.

I hope this makes it a little clearer.

Cheers!!

Account Closed · Answer

How would this be accomplished?

Tom Mole · Answer

@Andy, there's something weird in your numbers. It seems like you're figuring your debt service into your direct operating expenses. How much do the about 11 units bring in each month and how much does it cost each month to make this happen, EXCLUSIVE of paying the owner carry? You'll need this to be clear for anyone, bank or investor, to be willing to back you. Really I wouldn't care as much about the "how much" answers as I would the "percentage" answers. In other words the $3k/month would not matter if you turn out to be making a 3% cap rate in a 9% cap market.

Next, how is spending $135k going to improve your gross income from $5k to $9k and how long will that take? Just ball parking on the numbers you gave, in which it appears that 11 units are producing the current income. Are the last 4 units going to rent for $1k/month? Do your numbers include vacancy at market rate? How long will it take to start realizing the new gross income? Besides debt service will your expenses increase against the new gross income?

If I were asked to lend $135k for renovations, I would need a lot better description of your financials. What is your current Loan to Value (LTV) and Debt Service Coverage Ratio (DCR), which means, how much do you owe and how well can you pay for it? I would probably not lend you rehab money on a second if it would put you over 65% Combined LTV (CLTV) and/or under about 1.1% DCR), even if your future income numbers could come true.

I'm surely NOT trying to discourage you, but suggesting that you get the "weird" out of your numbers before talking to anyone about a loan. I would NOT even finance the rehab out of my own pocket until I got the weirdness out of the numbers. Not knowing or being willing to know the numbers is often how we talk ourselves into financial disasters. Don't be that guy!

From all of this you SHOULD have questions, since I glossed over and skipped a bunch of details. If you have questions, feel free to contact me. I'll do my best to help.

Cheers!!

Joseph Gozlan · Answer

I would look at it this way:

On one hand, I can try to find a local bank that will like me enough (yes, it's a person-to-person relationship in these small banks) to give me the loan to refinance but they will do LTV or LTC whichever is LOWER and will usually use the current NOI as the bases of valuation.

On the other hand, you can use other sources of funding such as HELOC, private loan from friend/family, bring in a private investors, etc. get the renovation done, stabilize the property at the higher NOI and THEN refinance. If your at least 2 years into your ownership and the property value is high enough you could possibly get into an Freddy loan.

Now, note that the second option is only viable if your estimated NOI for post-renovations is true which makes option B a higher risk option.

Good luck

Michael Le · Answer

Local bank would probably be the best option. Also depends on if the terms from the seller is really good or not.