Here's something that just occurred to me....

[Glenn Mayo]

Let's say you're going to buy an apartment building. It doesn't really matter what size, but just for this example, let's say it's a twenty unit building. The building is fully occupied, and the tenets are all paying their rent. While you're doing your due diligence, however, you discover significant deferred maintenance issues, which necessitate some rehabbing on the building and the units. How do you go about getting the rehab done when the units are all occupied? I don't believe you're allowed to simply boot everyone out the door so you can spruce the place up, but you can't do the rehab with them in there. Assuming you can't finance the rehab out of your own pocket and do it gradually as each unit's lease expires, how can you do it?

[Mike Dymski]

Not having the capital to address deferred maintenance or trying to use the property's cash flow to fund rehab is risky and one of the reason that investors lost properties to repossession during the last downturn.  It's best to have a source of liquidity at inception, or raise the capital up front to fund the rehab or have a construction/perm (mini/perm) loan to fund the rehab.  With the construction/perm loan, you provide proper notice to the residents before their leases expire (or right away with the MTMs), rehab, roll the rehab costs into the loan and the loan converts to permanent amortizing financing after the construction period...6-12 months.  Matching your debt structure with your strategy is important.  Otherwise, if you have a hiccup in cash flow for whatever reason (downturn, roof replacement, a few lease breaks, couple of HVAC units crap out, etc.) you can't maintain the property and end up in a downward spiral.