Apartment Curious

[David Wolf]

Hi All,

I don't think I have really ever posted on this board but have read it for years. This forum has given me great advice which has allowed me to purchase a few SFR's in the middle Georgia area at great prices. Now I am researching the feasibility of apartment buildings but have a few questions.

Quick Bio: I am 31 years old and have served 11 years in the military stationed at Robins AFB, GA. Currently I have about 250K liquid which I would like to put to use other than the stock market.

Anyway, I was looking at at an apartment renovation project which I found on Loopnet. This property consists of 42 condo style 2br/1.5 bath units(1300 sq/ft). Currently 5 of the units are rented at $550 and 36 of them are completely trashed. I drove by the property and I mean they are trashed. They would require HVAC, wiring/plumbing, carpet, kitchen etc.. Essentially a complete rehab.

The positive points are that this apartment was at least semi rented not that long ago. I have gone back in satellite historical imagery and just took a look at the car count. In additional 5 of the 7 buildings had new roofs installed within the last 5 years. Overall this complex just looks like it has completely suffered from owner neglect. The owner also has a few other properties in the city(thanks tax records) which are in similar disrepair.

The owner is asking about $300,000 which is probably too much for the state the property is in. While I have not had a general contractor walk the property I am estimating that each unit will require approximately $15,000 in repair. In addition the property would require a security gate/fence, parking lot resurfacing, and lots of landscaping.

Financial Data – I have created more detailed spreadsheets to model this out but here is a quick overview.

Price: $150,000 (thats what I would probably offer the owner)
Renovation: $525,000 (units) + $75,000 (miscellaneous items)
Total Cost: $750,000
Pro Forma Rent: $277,200
Expenses: $138,600 (estimating 50%)
Net: $138,600
Cap: 18.48%

Obviously the above numbers would be excellent. However, this does not take into account holding costs while the property is renovated and stabilized. In addition the expenses are a complete guess as it is hard to estimate with a near empty complex.

Enough with the background and on to my probably simplistic questions:

Financing Questions
Obviously a bank would not give a standard commercial loan on this project as it is not stabilized.
Financing possibility
a. Commercial Construction Loan - What do you think the chances are of obtaining a construction loan to rehabilitate and stabilize the property. After it is stabilized refinance.
b. Hard Money – Huge risks with this. What happens if you only have 50% rented out after a year? Would it be possible to get a typical commercial loan on the amount owed to the hard money lender? The property would have no problems paying the loan at this occupancy rate and still have 50% for expenses.
c. Any other financing options?

I could go one but I think this is enough for one post.

Thank You,

David

[Joel Owens]

Hi David,

My question would be are the 42 condo like units part of a fractional development or does the 42 units make up the whole complex??

I do not get involved with properties where I am competing with the interest of other owners and everyone has to be on board to turn it around. Too much capital at risk in that situation and not the level of control you want with a project.

You would most likely be using hard money in this situation. To refi out and stabilize you would need 12 to 18 months time before getting a conventional loan. The banks on the new loan are going up to 75% of the new appraised value.

Who is the owner of this property?? Bank, individual, corp.??
If a bank owns it and they are a local or regional bank you might could talk them into a short term loan to carry the property for 12 to 18 months and then cash them out with a new loan.

"What happens if you only have 50% rented out after a year?"

This is where many make a mistake. On rehabs such as this you DO NOT ask for market rents when stabilizing. If the going rent is 550 a door then I would base my calculations off of 500 a door. This makes tons of applicants want to move to your property. You screen out the duds and then take only the best qualified and leave the marginal to bad tenants at the other complexes.

Then after you have filled up fast in years 2 and 3 you increase rents closer to market rates slowly.

What year was the property built?? I fit is before the mid 70's you will have lead based paint issues upon rebuilding and other things that will increase costs with the newer government guidelines for rehabs. This is why the age of the building matters. If it's really old you could have a galvanized water main going to the street as well as a host of other issues.

I think 15,000 a door is about right for the size of the units and fixing the outside as well given that there are no more other large surprises that could run the total cost up.

Take 42 units at 15k a unit rehab = 630,000

If landlord is to pay water you use 60% for total operating costs averaged over time. Since you are doing complete rehab you would need to know If tenants pay water is typical for the area or is it customary to be included in the rent?? This is critical to know before rehab because if it is included in rent at all other places putting in separate meters they will just go elsewhere as they are conditioned to not cover that bill directly. If it is just your building is old and has not been converted then try to see about getting separate water meters billed direct to tenants from the county or city. You can use private sub meters if the city or county will not allow a direct connection to each tenant but then you the landlord still have to pay the bill and pursue collections if the tenants do not pay so not optimal.

Rehab 630,000
Purchase price 150,000

780,000 total = 18,571.43 a door for 500 in rent

500 X 42 = 21,000 21,000 X 12 = 252,000 expected yearly gross

252,000 with no landlord utility .50 = 126,000 NOI 10 cap 1,260,000

1,260,000 X .75 = 945,000 new loan value once stabilized

Landlord pays utility goes .60 costs = 100,800 NOI
10 cap 1,080,000 new value X .75 LTV = 756,000 new loan value once stabilized.