Dilapidated 5 Unit Multifamily Mid-Century Modern Building - IOWA

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Dilapidated 5 Unit Multifamily Mid-Century Modern Building - IOWA

Amelia McGeePro Member
Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes

Hey all -

I need help analyzing a deal on a very unique 5 unit multifamily property in a small town in southern Iowa. The building is a large brick building designed by a prominent engineer in the 1920s.The town where it's located is actually my hometown so I know the area very well and still have a lot of connections there. There is a significant need for updated/low maintenance/safe housing so I do not think there would be any problem finding tenants for these units. For example: I have another 3 unit multifamily in this town and was able to fill the apartments the first day I posted the listing. I also own a SFH in this town and had that filled before we even took possession. There is also a hospital, large grocery chain warehouse, only school system in the county so there are people with money who would be willing to pay a premium price for a nice place to live. Retirees, doctors, teachers, etc.

Couple Predicaments:

1. The owner has let the building sit vacant for 20+ years. The roof has leaked extensively and it will likely need to have all new systems (electrical, HVAC, plumbing, flat roof, refurbished steel casement windows, etc) along with significant updates to flooring, walls, bathrooms, kitchens, etc. I have never done a major renovation like this so I need some help estimating costs.

2. My other issue is the owner himself. He's 82 and a little bit off his rocker - thinks he has a one of a kind gem that is worth hundreds of thousands of dollars - and it could be but not in the state that it's in right now. We've offered him $45k cash or $70k owner financed with $20k down and a balloon payment in 2 years. Still waiting to hear back from him on these offers. Any ideas on how to get him to sell? I would be willing to go up in price as I think the ROI would still be worth it but I'm not sure how to go about estimating this.

3. There are VERY few comps in small Iowa towns to compare to. I don't know how to get to an ARV to be able to estimate my top dollar offer. The plan would be to buy cash and get a construction loan for repairs.

The units themselves are huge. There are 2 - 2bed/1ba on the main floor at probably around 1,200sqft each. There are 2 - 2bed/1ba and 1 - 1bed/1ba upstairs that are also very large with huge bedroom closets. There are two large storage units in the hallway upstairs that could easily be converted into laundry (right now laundry is in the basement and we would want to move these upstairs to get a premium price for rent). The basement is also a full basement with 9 foot ceilings and a bathroom. Could easily be turned into a 6th 2 bedroom unit. I think it wouldn't be out of the question to ask $850/mo for the bottom units and $800/mo for the top units. There is another building in town that was built by the same engineer and renovated 5 years ago that rents for $950/unit and is always full with a wait list.

If anyone has any advice or experience with something like this it would be greatly appreciated. Also, if there are any investors in Iowa who would be interested on partnering for this deal, please reach out to me privately.

I'm posting a Google photo of the property for reference - it's the best I could get!

Thanks for reading!

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Darson GranthamBusiness Member
Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
5y

Hi @Amelia McGee, i personally love these small town gems, but i caution you to make 100% sure you are thinking like an investor and not like a home towner.

In regards to ARV, you are going to want to back into this. Determine the pro-froma annual rent once all units are rented. Then determine the costs to repair the building.

Once you have those items you can determine what you want you rprofit margins/cashflow to look like right?

One method would be 


purchase price = ARV x 70% less expenses to bring up to full occupancy

Another might be:

Total monthly rents / (purchase price +repairs + holding costs) = 2% 

If it is above 2% you are getting a pretty good deal, if it is below 2% in a small town... not good IMO

I'd be happy to discuss in more detail on a call if you want.  

[email protected]515-612-6013
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  • Darson GranthamBusiness Member
    Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
    5y

    Hi @Amelia McGee, i personally love these small town gems, but i caution you to make 100% sure you are thinking like an investor and not like a home towner.

    In regards to ARV, you are going to want to back into this. Determine the pro-froma annual rent once all units are rented. Then determine the costs to repair the building.

    Once you have those items you can determine what you want you rprofit margins/cashflow to look like right?

    One method would be 


    purchase price = ARV x 70% less expenses to bring up to full occupancy

    Another might be:

    Total monthly rents / (purchase price +repairs + holding costs) = 2% 

    If it is above 2% you are getting a pretty good deal, if it is below 2% in a small town... not good IMO

    I'd be happy to discuss in more detail on a call if you want.  

    [email protected]515-612-6013
    3Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Darson Grantham Thanks so much for the response! I know it can be easy to get sucked into 'home towner' thinking which is why I want to carefully analyze this deal before moving forward. I'll run some numbers on your suggested formulas but my big problem is I have no idea what the ARV will be because there are so few comps in rural Iowa. Right now I've estimated repairs to be around $150,000 so I guess I can use that as a starting point.

    0Reply
  • Andrew Kougl
    Chula Vista, CA · Member since 2017 · 195 posts · 104 votes
    5y

    @Amelia McGee

    I think focusing on the ARV makes it seem as though you plan to refinance or sell it once you fix it up. But from your post it sounds as this is a buy and hold rental. I'd be focused on cash flow, COC return and cap rate vs ARV. I think you need a couple estimates from GC's who are available to do the work and then back out your formulas from there.

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  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Andrew Kougl Yes, it would definitely be a buy and hold rental - I've run the cash flow and COC returns from my rehab/purchase price estimates already and they look good. It's a little harder to run cap rate since I don't know what the market value of the property will be worth after renovation (due to little comps in the area).

    Good idea on the GC suggestion - I'll be contacting a few in the next couple of weeks to put together estimates.

    0Reply
  • Darson GranthamBusiness Member
    Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
    5y

    @Andrew Kougl Is 100% right. ARV directly based on comps is (kinda) irrelevant for a property that is 5+ units. You need to base the value on the final rental numbers.

    Look up how to evaluate the value of commercial properties.  How to calculate caprate will help.

    [email protected]515-612-6013
    1Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Darson Grantham @Andrew Kougl Thanks, duders! This is my first 5+ multifamily that needs a lot of rehab so I appreciate the help :)

    1Reply
  • Darson GranthamBusiness Member
    Realtor · Des Moines · Member since 2018 · 304 posts · 253 votes
    5y

    My pleasure!  Feel free to message me if you want to talk through anything!  happy to help!

    [email protected]515-612-6013
    0Reply
  • Rene Owczarski
    Rental Property Investor · Des Moines, IA · Member since 2020 · 232 posts · 116 votes
    5y

    @Amelia McGee About the seller, as long as you think he's acting irrationally and you're acting rationally (because we're all irrational), the longer it's going to take to make a deal with him. Because if it's sat for 20+ yrs empty, he's in no rush to do anything with the place. And he already gave you a clue about himself and this building, in that this building is special to him, a gem, so to speak. Talk to him, find out more about what he means by that. Maybe he was friends with the engineer that built the building. Go down the rabbit hole with him, and that's how you'll make a deal with him, and structure it that it's a win for everyone (cash/terms/etc, etc).

    On the rehab, have you thought about reaching out to the company that did the rehab on the other apartment building in town for a list of their subs, or to maybe partner with them on this deal?

    And I agree with @Andrew Kougl, that since this is going to be an income property, you'd be better off using the income approach to generate a value, instead of comps like in residential real estate.

    So say you estimate $850 to the 2 bed units and $800 for the 1 bed. At 50% expenses from gross rent and a 10 cap, I get a value of $252,000 after renovations and rented out. Which on a per unit basis, is inline with what stabilized apartment units are going for in Des Moines right now.

    0Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Rene Owczarski We're on the same page. I just ran the numbers and got a cap rate of 9.75 and a value of $250,000 after renovation. Those are conservative numbers as I overestimated for repairs and underestimated on rent. 

    Great idea on reaching out to the company that rehabbed the other building - I know the project manager who was in charge of it so should be a good foot in the door to get some info.

    0Reply
  • Rene Owczarski
    Rental Property Investor · Des Moines, IA · Member since 2020 · 232 posts · 116 votes
    5y

    @Amelia McGee Oh, you've got a easy in then, if you know the project mgr. And if anything, you can have them walk thru the building with you, as a second set of eyes, in case you miss any rehab items.

    0Reply
  • Kevin Manz
    HVAC Tech · Fort Wayne, IN · Member since 2015 · 423 posts · 223 votes
    5y

    That is a big building for 5 units. Considering you have an extensive remodel, maybe think about turning it into a 10 unit? Wish you success with it!

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  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Kevin Manz It is a huge building! I think each floor is around 3000sqft - possibly more. Hadn’t thought about adding additional units (other than in the basement) but definitely something to consider and talk to the contractors about. 

    0Reply
  • Ryan Avila
    Rental Property Investor · Napa, CA · Member since 2016 · 69 posts · 75 votes
    5y

    @Amelia McGee


    I would definitely get a contractor in there to get a better idea of renovation cost. Based on what you said was needed for repairs, essentially everything, my gut tells me that $150,000 is significantly under what the actual rehab will cost.

    Think about this, at 3000/sf per floor with a basement and 2 floors above your looking at 9000/sf total. Even at a very reasonable price of $4/sf for flooring (installed), your looking at $36,000 or about 25% of your estimated budget in just flooring alone. Now you factor in a new roof, electrical, HVAC, plumbing, interior fixtures, paint, etc. and the rehab budget begins to swell fast.

    Also when it comes to renovating old building like this, they are a Pandora’s box. Everything you open up will lead to discovering more issues/repairs that will need to be addressed. 

    Get a contractor in there who can give you a solid estimate before you come to any agreement with the seller. You wouldn’t want to buy this place for $70,000, to then find out its going to take $300,000 for renovations. Now your into it for $370,000 for a building that you estimate to be worth $250,000.

    2Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Ryan Avila For sure! Great advice and definitely something we will act on.

    0Reply
  • Joseph Stammeyer
    New to Real Estate · La Crosse, WI · Member since 2019 · 17 posts · 7 votes
    5y

    @Amelia McGee

    How did this turn out?

    0Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Joseph Stammeyer The seller rejected our offer HOWEVER the city is forcing the owner to sell or they will take possession so all hope is not lost. I've talked to a few other investors in town and they all said our offer was very generous considering the condition of the property. 

    Like I said earlier, the owner is pretty delusional about how much the property is worth. I have a feeling the city will end up taking possession of the property and we will have to buy it at auction. He already had another apartment building taken away from him a few months ago by a city about 20 minutes away from this one.

    0Reply
  • Joseph Stammeyer
    New to Real Estate · La Crosse, WI · Member since 2019 · 17 posts · 7 votes
    5y

    @Amelia McGee I feel sad for him. He obviously had a lot of pride in ownership of these buildings. But now due to his mental decline things have been left to decay. Mental decline is a tough reality for many. But, perhaps this will give you an opportunity to own a rich piece of history. I would love for you to keep me updated and perhaps if it comes to market and you are still looking for some sort of partnership we could talk.

    0Reply
  • Amelia McGeePro Member
    OP
    Investor · Des Moines, IA · Member since 2020 · 20 posts · 10 votes
    5y

    @Joseph Stammeyer I'll keep that in mind. I wouldn't feel too sad for this owner. He has let it sit vacant for 20+ years and is also known as a 'slumlord' - a name that he truly lives up to. I know of 2 other landlords/investors in this town who have given him cash offers that he has refused. He has been warned by the city for many, many years that he needs to do something with the property (along with a few other properties he owns). They are fed up with him and are holding him in contempt of court for not making the repairs that he was ordered to - hence why I believe we will end up purchasing this at auction as no one is willing to pay the price that he is asking.

    0Reply
  • Carl C.
    Investor · New York City, NY · Member since 2014 · 289 posts · 374 votes
    5y

    I can only speak to New York costs for renovations, but in an old building that has been abandoned for some time, I can't imagine that renovation only costing $150,000. In my mind, I would think at least $500,000. In New York, you'd be looking closer to $1million. Sounds like a fund project but be careful that you don't lose your shirt on this. Good luck. 

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