Appropriate returns in rehabbing multifamily

[Paul Khazansky]

Question for experienced rehabbers out there that target multi-family (5+ apt. buildings) -- what return do you target and you've been able to successfully achieve? I figured given the liquidity risk (funds are tied up) and performance risk (amount of effort/execution that goes with rehabbing) the required return must be fairly high relative to required return with other property types.

[Eric Claxton]

Paul,
I agree Joel is a huge asset to the site- always very entertaining reading his answers. We have done alot of deals the way Joel outlines, however we see a difference in what we do- light rehab (we refer to it as CAPX, which is the items HUD will require us to upgrade and repair before we can stablize and refinance the asset)- and Rehab is what I think Joel is referring to- total rehab from the studs up (which we would only do in a tax credit asset or 501(3)C bond deal for a nonprofit asset -it is very costly & time consuming).

We have found that when you start rehabbing multifamily one thing is always true- always expect to spend more than you budget. If you dont, then things will get sticky. For example, last year we bought an asset (400 units), and thought that it was a clear case of mismanagement, and the asset just need standard CAPX and a correction of course in management. Well after we bought it and begun the rehab we found that the original $500,000.00 in upgrade we had planned to spent , soon grew to $1.8M because we got in and found there was alot hiding behind the walls and under the flooring. We had no choice but to spend to fix the asset- because without doing so, we wouldnt be able to sale at a profit nor could we stablize and refinance. In the end, it worked out fine for us- it was just alittle stressful for a month or two.

Bottomline: you can make great returns (25%+) on buying value-add multifamily, and turning it around for resale or refinance.

Originally posted by Paul Khazansky:

Joel Owens first, I've been following your posts for some time now and think you're certainly an asset to this site. I appreciate a comprehensive response to my question.

The thing is, the example you provided is a slam dunk deal, which may or may not happen. I wanted to know what one can realistically and conservatively expect in a rehab business on average. Assuming you won't be "killing it" in every single rehab deal you do, what are reasonable expectations?