How to finance a Multifamily/mixed use with no NOI (empty)?

Question

All,

I'm looking at a rundown mixed use 4 unit upper, retail lower.  Tenants currently don't pay rent (because no one enforces it - building owner has died).  I'd evict, gut it, renovate and rent.  Is my only option hard money - assuming I don't want to self-finance?  And how long would I have to be showing good numbers before a refi?

Thanks much!

Danielle (just jumping back in after a year of rest :)

Kristina Heimstaedt · Answer

Run. You're losing money as you try to evict the tenants. You're losing money while you fix it up. You're losing money until you find a new tenant. The timeframe that you're attached to this property before you begin to see it perform is so long.

Maybe you could look at it as a flip and work it like a turnkey property. I just know too many investors, including myself who would't touch this deal with a 10 ft pole.

Obviously everything has a number. For me, I'd want to conservatively estimate that if I did everything at lightning speed and all went according to plan that I'd want to see double the rate of return that I would normally expect from purchasing a property. I just don't know that there is enough upside to make the deal attractive.

Patrick Liska · Answer

Danielle,

I would go to a lender with all your financials in order, explain to them what has happened with the property and that you have no current data, but supply them with data of current rents in the area that are similar. If you already have other properties, a commercial lender will look at your past history as a current landlord, your net worth and what rents could be. does not hurt to try if you do not want to go with the hard money lender route.

Dash Siva · Answer

We recently turned around a similar multifamily property - feel free to reach out and I'd be happy to share our experience with it

Todd Dexheimer · Answer

@Danielle D. I love these kind of deals and have bought dozens of them. When you are looking at the numbers be sure you are conservative and think of everything that could go wrong. Having tenants out before you close is very important as well.

If you are estimating $40k for rehab, count on $50k, if you are expecting 6 months for renovation and lease up, plan on 10 months, If you budget for holding costs (taxes, insurance, maintenance, utilities) to be $3000 plan for $5000. Then when you run your proforma make sure your projections are landing this deal well above market value.

For money, try your local banks. When I was buying 1-10 unit properties like this I would get renovation financing through a commercial loan with a local bank. The first time it took me dozens of phone calls. You will get plenty of no thank yous from banks, but don't give up until you called at least 50. Take it from a guy that called over 100 banks to get terms and rates and yes's. You can also try partnering or private money as well, which has worked very well for me.

Danielle D. · Answer

Thanks for the quick responses.  The upstairs has 4 units but there are two retail units on the lower level - which I assume makes it a commercial loan.  The ask is $900k but my proforma tells me not to go over $650k.  So, if I can convince the broker that he's not priced correctly, maybe it'll be mine.

I mentioned that I'd evict but I'd actually make the close contingent on the former owners evicting (which I think they've started.)

Re: the expenses, I'm conservative so I made them 38% of revenue.  It's small and in the neighborhood and will basically be brand new so I'll self managed this one.

I'm comfortable with the reno work and it's in a HOT area that is turning over, so comfortable there as well.

Appreciate the feedback everyone!

Rick Stein · Answer

Have you looked into private money? I would create a proforma with anticipated market rents. Maybe someone would either invest in your project or partner with you for a piece of the action. There are billions of dollars collecting dust in money market accounts and CDs. These people would salivate over 5 or 6 percent. Delay the first payment four months to give you time for rehab.  Make the loan as long as possible "just in case". You would need it for a minimum of a year so you can finance it with an institutional lender. Be creative!! How about someone with a self directed IRA? There are numerous possibilities.

Good luck!

James Wise · Answer

A property with 4 units or less will fall under residential income guidelines. Whether or not you qualify for the loan will be almost soley on the income of your job & your DTR. If your income & your DTR show that you can cover the costs of this mortgage (without using rental income) as well as your other debts you should be good to go.

Mihir Bhimaraju · Answer

Does the NOI/Cap rate still apply to estimate the price? How do you estimate the expenses on this one?

How to finance a Multifamily/mixed use with no NOI (empty)?

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