Per unit budget...can we see yours?

Question

Ugh....I’m really struggling with this! Probably because I’m going about it all wrong, but...I need to get numbers to the bank to determine my project financing. I’ve been interviewing contractors, shopping for materials, trying to do my best to prevent the unexpected from happening.

I have 20 units, circa 1972, red shag carpet and avacado appliances anyone? Structurally sound with good roofs, newer windows and vinyl siding. Inside, they need everything.

What’s everyone’s typical approach to this? I know I could get a remodeling contractor to just deliver me a turnkey apartment, but I feel that I’ll get more for my money looking for specific contractors such as flooring, paint, doors & trim, etc. I also love to shop for bargains and getting the best deal on 12,000 feet of LVP and a full appliance package is something I’m not sure I could trust with anyone else.

I started out with a good round number for this project, $10k per unit. I was going to attempt to replace HVAC, all new appliances, new flooring, new kitchen cabinets, new vanity, faucets, lighting, etc.. I’m starting to see that I’m going to be closer to $16k per door.

What should I be more focused on here, the increase in my loan payment or the higher rent these improvements will generate?

Please share your opinions.

Thanks!

Percy N. · Answer

@Tab Teehee what finishes do the competition have? What is their rent? Occupancy levels?

Then work the numbers to make sure you have good cash flow post renovations when you underwrite for the avg rent for a similar unit in your market.

Do you need to change the HVAC? That can be very expensive. Do you need new cabinets or can you refinish?

Etienne Martel · Answer

Hey Tab,

I would advise you to make a relationship with a contractor of that scale. You may not want a contractor that has only done SFH, because they may view of process differently than a multi-unit contractor. The multi-unit contractor may also have the discounts on materials since he is contacted buying large amounts of materials.

If your offer is accepted and you still haven't closed, you can always ask for a credit back from the buyer if it's all going to hell. If you haven't closed, you can still back out.

Get the contractor quote, check the market rents with the same unit quality, and know your operating expenses.

Thanks and don't give up!

Paul Sandhu · Answer

Make them short term rentals.  Furnished, bills paid, all appliances and amenities included.  I used to get $450 a month for units at an old apartment.  Now I get $400 a week for a furnished bills paid unit.  It helps if you have a major industry where contractors stay in motels where they work.  I take the word "help" back.  Replace it with "mandatory".

Tab Teehee · Answer

Possibly need a new thread for this but it still definitely applies to this original question....

I reached out to my prospective property manager about how stressed I was trying to get the numbers right on my project.  She definitely feels like I have more than enough room to add the improvemts I’m hoping for, based on recent comparable sales. She feels she can get my project completed at $10k per unit, and is asking if I’d like her to coordinate everything through her contractors and suppliers....for a nominal fee. I believe the nominal works out to be about 5% of the overall cost, or $10k.

Is this a typical scenario in this industry? This manager is highly regarded in her success repositioning properties such as mine. I will say I like the idea of handing all of the decisions over to someone else, lol.

Tab Teehee · Answer

Ok, that makes sense. This is definitely a buy and hold situation.

Henri Meli · Answer

@Tab Teehee Thanks for clarifying the picture here.  One last question, what are your short/long term plans for the property?

1. Long term hold ? If you are looking to hold it for some time (10+ years?), then I would look at material that can last longer and sustain more wear and tear.  This could be a little more expensive, but will save you money longer term.

2. Rebranding, reposition and exit via sale? If you are looking to exit after stabilization then I would focus on bringing it to the minimum level comparable to neighboring properties.

I would look at @Todd 's suggested approach. I would also factor the appropriate exit strategy into the costs per unit and the calculated ROIs I want to achieve... i.e.: Spending $20k/unit to exit in a few years ... seems a little extreme to me. However, spending $20k/unit and knowing I will hold the place for 10+ years with 2-3% rent increases per year ... would make more sense.

Hope that helps !!!

Good luck !!!

Tab Teehee · Answer

certainly Jill, glad you asked. There are 12 two bedroom units at 774 square feet and 8 one bedrooms at 661 square feet, for a total of 14,578.

Jill F. · Answer

I'd need square footage to even venture a guess

Todd Dexheimer · Answer

For what you are describing I would expect a minimum of $12k all the way up to $20k+depending on the finishes. I would get your GC quotes and go with that for your budget to the lender. You can always choose to use your own subs and be the GC.

To understand the level of completion that you should do, you need to understand the market and the rents that are achievable. If you can get by with re-facing the kitchen and bath cabinets and keeping the bath tile, that could save you thousands and may result in only a slight change in rent, but in other markets/neighborhoods, that can be the difference between $1000/unit and $1500/unit. My main point is calculate your ROI on improvements at different levels.

Tab Teehee · Answer

Henri,

I’ll give a bit of history here...

These apartments were built by my Father-in-law back in 1972. My wife and I are taking on this project for both its investment potential as well as sentimental value.

I’ve found an awesome management company that has prepared a 2 year pro-forma for us. With the projections to have us cash flowing in about 5 months.

As far as the roofs go, they are 30 architectural shingles about 10 years old, but are installed over another layer.

You could probably rent many of the units as/is or with little improvement for $200 to $300 less than competing properties.

Per unit budget...can we see yours?

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