6-Plex Rehab/Hold/Refi. Advice

[Dan Kelley]

Hey all, hoping to get some input about a potential deal I came across.

The property is a 6-unit brick building located downtown in my city. The building is entirely vacant and is need of rehab. The company who currently owns it started the process by re-doing the front staircase (approx. 20ft wide concrete entrance- looks spectacular), installing a new roof, and purchasing all new windows and installing maybe 10 of them. They also began sanding the floors. I spoke with the property manager and he informed me that the company also owns several other multi-family buildings (a 12 unit right behing this 6 plex and several more) and they are selling all of their Dubuque, IA properties in order to focus on their larger investments in Chicago. They just recently sold a few others in Dubuque.

The property looks to be structurally fantastic. I've rarely seen a brick building with as nice an exterior as this one in my town.

Here are the details:

1. Asking price: $99,000

ESTIMATED ARV: $270,000-300,000

2. Rehab Details:

- HVAC duct work has been roughed in but every unit will need furnace/AC installed. Units were originally boiler heat. Boiler has been removed but radiators are still in every room.

- Every unit is nearly identical- all 2/1. 2 units per floor, 2700 sq.ft. per floor.

- Each unit has nice original hardwood in good condition that can be refinished.

- Paint is peeling of the walls and a lot of plaster is broken. Will need to be checked for lead paint. Much of the plaster will need to be redone/replaced with drywall. There is the opportunity to expose a lot of interior brick walls which is HUGE in our downtown area these days. Everyone is rehabbing old warehouses and making apartments out of them.

- Every bathroom needs gutted and redone.

- All the new windows are sitting in a room waiting to be installed.

- Needs full kitchens installed in every unit

3. Plumbing/Electrical- Currently utilities are not split, however the basement houses separate electrical boxes (fuses) for each unit. I should be able to have new breaker panels installed an a 6-gang meter socket to split electrical. Water is currently on 1 meter, however there are six seperate shutoffs in the basement, so it should be easy to feed each shut off from its own meter.

The numbers: I'll attach a PDF of my excel report.

My concerns/What I need advice on...

My goal is to do a lot of the work myself/ hire college and highschool people to help with the grunt work. I will hire out the electrical and major plumbing work. I will do kitchens and bathrooms, floor refinish, drywall work myself.

I'm estimating

$6,000/unit for furnace/AC install (still need to get estimates as I get closer)

$2500-4000 for new electrical panels wired

$4,000-8,000 for the water meters to be split/installed

Other than those major items, I've figured around $16,000/ unit to get them up and running.

I feel like I've gone through and covered all the bases, but I don't want to end up surprised and that I estimated way short. Does this sound reasonable as far as rehab costs are concerned? I can certainly provide more information as to how I came to these conclusions, but just looking for some rough ideas right now.

FINANCING: After talking with a mentor of mine (owns over 100 units in my city), he suggested I consider seeking financing from the seller. Here is my idea:

I seek seller financing for $240,000 at 5% (or whatever we negotiate) am.sch. 20yr, 2 or 5yr balloon. 

Subtract $48,000 as my down payment

Subtract $75,000 as  the building purchase price

Remaining: $117,000 as my rehab budget. 

So basically the seller carries a $240,000 not but my balance is $117,000. They cash out the $117,000 to me- I do the rehab and get it rented. Then as soon as I can after rehab, I refinance with a traditional lender for close to my ARV ($300,000) , pay off my remaining $117,000 with the seller's note, then cash out my equity and pursue other properties while cash flowing the 6-plex.

Am I crazy to think that a seller would even consider something like this? My thought is that being that they seem to be a rather large enterprise with big projects in chicago, money shouldn't be an issue. They also may be able to get a rather large some of money at a nice low interest rate, so it's an opportunity for them to earn some interest. Obviously 5% is very low compared to a hard money lender, so I can certainly offer a higher interest rate.

What are your thoughts? Go easy on me! Am I way off in thinking that I can deduct my down payment and purchase price from that 240k note? Am I way low on rehab costs? This would be my first real rehab. I have a lot of people in my life that will be able to help and guide me, but I wanted to come to you guys first and to my homework before I use the time of my local investors who are running their own business.

Thanks for your input!

[Elizabeth J.]

Hi Dan,

It sounds like you are really doing your homework and being very thorough!  I can't speak to some of the estimates, but having bought a very old (1917) 6 unit building in Chicago recently, I can give you my 2 cents on my experiences.  I think your estimates for the electrical might be a bit on the lower side.  We already had updated panels in our building, but the prior owner did some sloppy work and the electrical was very overloaded in one unit (excuse my ignorance of some of the terminology - you seem to understand it much better!).  Anyway, I had to spend close to $1,000 in that unit fixing that situation and installing a lot of new wiring, from someone who was a friend of our handyman - so I know he was not charging us as much as he could have.  Our building still has a lot of old wiring behind the walls, which does concern me.  Since you are redoing so much of the building, have you considered whether it might make sense to redo all of the electrical?  Not sure if that is feasible, but you might want to price it out to see if makes sense to start fresh and not have to worry about cloth wiring, etc.  Don't underestimate the cost of installing all of those fixtures, plus emergency lights (which you should put in common areas).  They tend to add up.

Plumbing costs can also add up especially if they need to bust through concrete in a basement to assess a problem - I would get your plumber out there (and the electrician for that matter) before you proceed on anything and get the costs more nailed down.  I would have the plumber address water heaters - what is there now, what is needed for each unit, cost, etc.  Also, where will the laundry be?  Is there going to be common laundry in the basement?  If so, factor in cost of any plumbing needed plus the cost of commercial machines (can be quite costly).

We had an existing HVAC system so we haven't had to address that or the meters (we had that also in place) but that sounds like a great plan - just not sure about the cost.  I would have an HVAC person take a look now rather than waiting until after you proceed further.  If the seller is truly interested in selling, they might consider allowing you to get in with these people to get a clearer picture on your true costs.  The seller of our building was open to it so it never hurts to ask.  

Awesome about the roof being replaced.  We just had our flat roof replaced and that plus skylights plus gutters amounted to $10,000.00.  With roof being replaced, water intrusion from above should not be an issue, but still think about whether water can get into the building some other way.  Our broken sidewalk is angled towards the building, allowing water to go towards the foundation.  Definitely a bad thing that needs to be addressed sooner rather than later.

I think your rehab per unit estimate of $16,000 sounds reasonable, especially if you plan to do a lot of the work yourself.  The large area of the apartments will probably mean each floor will be $1,500.00 $2,000.00 to refinish if you change your mind about doing it yourself and decide to hire professionals.  Ours were about $1,200.00 per unit but we have much smaller units with a lot less wood floor.  Makes a big difference, though and tenants will love it.  New cabinets could be purchased for about $2,000.00-$3,000.00 from a home improvement store.  We invested in stone counters for about $1,600.00 - worth it to me with the durability and tenants love it.  Maybe something to consider.  A stainless appliance package cost us close to $3,000.00 with the 5 year service warranty.  

Well, that's my book for the day.  Hope something from here will be of use.  I am not sure about how the financing situation would work, but others can probably give insight.  One thing you need to ask is about the eventual financing situation.  With a 6 unit building, you may have to get a commercial loan with the refinancing part.  I may be wrong on this, but you will want to ask.  With our 6 unit building, a commercial loan was the only option and it can be a rather complicated process.  Maybe there is another way for you to pay off the balance of the building?  I am fuzzy on this part with your more creative plan, but you should ask a mortgage expert.  Good luck to you!

Elizabeth