Buying a 14-Unit | My Journey

[Chris F.]

Going to use this post as my journey and learnings buying a 14-unit in Minnesota. A little background, I have bought a duplex and 5-unit before this is my first above 10 units.

Deal was recommended to me through a mutual friend that does property management over there. It's been owned since 2004 and hasn't seen much love.

Since my friend is closely tapped into the market he noticed the rents were way below market and all the leases were month to month. This area is just outside of a neighborhood that has seen explosive growth and development is already starting to happen.

Step 1 - Underwriting

I am a huge fan of Adventures in CRE and am using their value add apartment model. I took the OM rent roll and 2020 annualized PL to start the in place. We had to add property management costs into expenses as the current owner managed themselves. My start date is in September when I am hoping to close. For the first year I projected that for the most part things will stay the same. Under contract for $1,275,000, accounted for 1% closing costs, and threw in 50k for capex stuff (turnover and one of the roofs need to be replaced). Before closing I will be looking through all of the tenants and most likely starting around month 4 or 5 doing a turnover/lease up schedule to renovate, bring to market rents, and solid leases. We use appfolio to manage. In-Place cap on year 1 will be around 6.1%

Step 2 - Legal Formation

Formed a multi member LLC in Minnesota it was $155. We have a registered agent in-state although I am out of state. Got EIN number as well.

Step 3 - Loan

I was super set on a bank referred by my friend until their terms were way less favorable than what my underwriting had. Big learning lesson here, always shop around. Currently, I am looking at 4 different options and would be curious on what you think I should go with. I guess it somewhat depends on my investment strategy, which right now could go one of two ways 1) stabilize to market and refinance to get equity back 2) hold until I am old lol

1. 5yr | 3.75% | 20yr am | 80% LTV | .5% fee
2. 7yr | 4% | 20yr am | 80% LTV | .5% fee
3. 5yr | 4.25% | 20yr am | 80% LTV | .5% fee
4. 7yr | 3.4% | 30yr am | 2yr IO | 80% LTV | 1% fee
5. 5yr | 3.1% | 30yr am | 1yr IO | 80% LTV | 1% fee
6. 7yr | 3.5% | 25yr am | 80% LTV | 1% fee

So what would the benefit be going with the IO period? To me they seem like the best deal especially with the low rate and 30yr am. Also get to realize a nice cashflow in those first two years. 

Step 4 - Closing

TBD 😎 thanks for reading, will keep you all updated as we move forward. Happy to answer any questions or listen to comments.