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!