What's the best way to structure this for a money partner?

Question

I don't want to be insulting someone I'm looking to get funding from but I don't want to give away more than I need to either.

Multifamily with 32 units that needs 200K in repairs (drywall & septic system)

Asking price was 650K
Purchase price of 600K

Owner will take 300K cash and carry 300K at 5% for 6 months/ 6% for 6 months and 7% for 6 months unless we pay off sooner

Property repairs are 125K-200K - Septic has frightened other potential buyers, my partner has worked with this extensively for 20+ years and we have engineered plans for repair blessed by local health dept and a couple of bids from local contractors who know the property/area

Major cost is bringing units up to fire code for 1970 when they were built but no fire rating was installed between the units (currently 1/4" paneling, 2x4 studs and another piece of paneling)

ARV would be 1,300,000 - 1,400,000 @ 8.5-9% CAP (even though most recent comps coming in at 70K per door average, this is further from the college and age/condition just don't see this one reselling at over $2M

So if we flip at 90% of ARV based on the caps

1,170,000 Sales price
   600,000 Initial purchase
   200,000 repair
    30,000  carrying costs until cash flowing again

340,000  equity available to share with cash investor as well some additional land that won't be sold off with the building at that time.

NOI would be 9,998/month so 1.98 DCR if we were to refi on $850K after the repairs if we were to hold it long term which would give me $4,800/month cash flow to pay something back on the use of the money

Suggestions on what I should be offering? My preference would be to fix and flip and move on to other projects but I'm not opposed to staying in for a longer term.

Chris Martin · Answer

You are putting your investor in second position. And you (and your partner?) are putting in $200K? And you are looking for $300K?

The place is empty (no income coming in) with code violations. I think you will first need to add a subordination clause and then put together a really good pro-forma operating budget and income statement. That's just to get a fighting chance.

Scott Seaman · Answer

Thanks for getting back to me Joel, I find myself reading your replies often on other posts.

First and foremost - no sprinklers!! That was the first thing I checked!  Basically it's being done on a repair permit so there's no requirement to go beyond code at time of construction vs having to bring it up to today's (ADA would have killed the deal as well)

Almost vacant, last 2 tenants are on their notices, one has found a place that will open within 6 weeks and be out.

Hopefully you can tell me what I must be missing on the repair side.  There are 3 buildings w/ 8 2 bedroom units and 4 studio.  To bring fire rating back up to where they want it, I have to take down paneling and put up 5/8" sheetrock on both sides of a 16' long wall that separates each of the 2 bedroom units - so 6 walls total.  Previous owner literally did one building but no taping, fire caulk or inspections.

4 of the units require me to pull up flooring and pour on a concrete leveler to a certain thickness over the subfloor to get my rating between those units and the studios. Since I'll lose about 10 days waiting on them to cure we'll do them first and come back to them after the other units.

Current market is about 4% vacancy around here.  I'm only giving enough cash to clear the debt so that I get a clear title.  I think she'd do less if it wasn't for that.  I might be able to get lower %'s on the balance as each building gets done and rented but I don't know.  As for pricing by cap rate around here, there's not enough to really say there's a trend - last 2 most recent sales were both under 5% (crazy, right?) one sold in 1 day at full list and the other took less than 30 days and got 98.4% of list.  In 10 years up here I've always looked at anything in the area and wondered how in the world someone could make money off of it.   But it's a college town with limited buildable area, decently low property taxes, town restrictions for several more years on # of water connections due to having to upgrade their facilities and a landlord's cost for maintenance around here is basically zero.  I do affordable housing for disabled vets in big cities around major VA hospitals and it's like night and day when I look around here (Atlanta is on our list, hopefully before the end of the year btw)

Joel Owens · Answer

I think your projections are rosy. I think repair and lease up will take more time than anticipated. I also do not see an exit 9.8 cap on an old property that has been rehabbed. Around here that would be an 11 to 12 cap for an older stabilized building.

Is the building vacant or occupied currently?? What about the city making you put in sprinkler systems?? Those can get very expensive.

I think you need to hammer the seller down more on down payment required and terms of the debt service to make it more attractive to someone.