Please help guide through commercial deal

[Chris Mackinlay]

Hi BP.

I have an opportunity to buy 6 property complex. It's more like a small village. It's one property, but has 4 buildings on it. 

The current owner has it financed from private money. I can get into it for $20k and I'd take over the payments of ~$1450/month for the next 14 years. Then it'd be paid off for $263k, total cost to me. That includes principal and interest.

Most of the units are small studio apartments that would rent for $950/month. 

They are trashed. I walked the property with a contractor, it would cost me north of $75k to rehab all 6 units. I'm sure this will increase. All of the units will need extensive electrical, plumbing, sheetrock, fixtures, probably gas lines, some need masonry work, another has termite damage, two others have mold from failed siding, there is some roof repair to be done, tiling, basically everything. Like I said: LOT of work. The bonus here is I can set up separate meters for each unit. 

Problem is I don't have $75k laying around to fund this, so I'll be pursuing my own private money to make it happen.

Private money to hold the note, more private money to rehab it. Is this generally a stupid idea?

After all these repairs, the property should be worth at least $400k (I'll be clarifying this number some more tomorrow) and I'd like to explore a commercial loan. What is a general rule of thumb for loan terms so I can have a plan for a refinance?

Thank you for any input or experience!

[Erik W.]

Let me make sure I've got the numbers straight...

1) "All in" cost: purchase + rehab = $338,000.  Better add about $2000 for closing costs.  Let's call it $340K, but possibly more as you dig into the project.

2) Total rents $950 * 6 = $5,700.

3) Are you paying ANY utilities?  Studios can go either way in my experience, but in my area is it common for at least some utilities to be provided by the LL.

4) Other expenses: Trash?  Lawn care?  Snow removal?

If no utilities are paid, you're hovering around 1.6% rent to "all in" cost ratio.  I generally go for no less than 2% on SFHs where I provide NO utilities, NO lawn care, no trash, etc.  Also, this project isn't big enough to qualify for a lot of the sweet benefits of multifamily: there won't be a lot of forced appreciation potential.  Also, too small a deal for non-recourse financing.  Most of those start north of $1 million.

If all goes according to plan and you're all in for $340K and have $60K equity, that's okay at 17% equity.  Could possibly get refi'd within a year or so on better terms.  I hear most investors aim for 20% equity minimum right out of the gate.

It sounds like you do not have firm bids on all known repairs yet.  "North of $75K" is too vague.....5% north, 10%, 20%?  If this contractor has no clue, you could be in for $100K or more.  Get those bids locked in!

I'm not too excited about this deal yet, but perhaps there is something we haven't heard of.  What is your projected monthly net cash flow after all expenses?  What is your plan for cost-overrun?