All Forum Posts by: Jason Turgeon

$9300 rehab is less a rehab than a quick cosmetic upgrade. That's paint and flooring and maybe a new vanity. Not that there's anything wrong with that, if I could find deals like that I would buy them all day long. I'm on my 3rd rehab, first one was over $80k, 2nd one was so far into the 6 figure land I don't want to talk about it, 3rd one will be $90k+ when we're done. 

If you do find a commercial lender willing to do 20% down at a 30 year term, please share their coordinates because that's an exceptional deal. You see that on residential properties but not on commercial. 

You haven't told us anything about rents or expenses so it's hard to judge the overall picture, but so far it sounds like a decent deal. 

@AJ Osborne so what's the method to find out the true extent of this zombie supply if it's not reported anywhere? 

@Marc Latreille

I read elsewhere on these forums that "Pro Forma is Latin for 'lie.'" I think you might find that to be the case as you dig in. I took a look at the PDF for the first link you posted. Those numbers stink like 4 day old fish.

I am wrapping up the purchase of a 22-unit building in Texas that will cost me $770k and the gross income is about $160k. That's in roughly the same ballpark as this 12-unit building that you linked to at a price of $620k with income of about $117k.  With that experience still fresh in my mind, here are some questionable things I see in that Pro Forma.

• EXPENSE SUMMARY PER UNIT
  Repairs/Maintenance $2,000. Really? $2000 in annual maintenance for a 90 year-old brick building in a city with 100+ degree weather in the summer and 5 months of snow and ice in the winter? This should be more like $25k a year, and possibly much higher.
  Cleaning/Decorating $2,000 What is this? You're already paying for trash and janitorial elsewhere. Questionable items like this make me wonder what's going on.
  Utilities - Gas* $1,297 I would want to see these numbers verified, that seems very low to heat the common areas of an old building like this even though starred items are supposed to be actual.
  Utilities - Electric* $1,749 
  Utilities - Water* $5,418
  Property Taxes* $12,033
  Insurance* $1,834 I don't know if Chicago is just magically cheaper to insure, but my insurance is closer to $8k a year in Texas. Even my homeowners policy in Boston is $3000 a year. Something is rotten here. 
  Scavenger* $2,447 
  Janitor* $1,787
  Management $5,262 OK, I may not be getting the best deal in the world, but I am paying 7% in management. On top of that, I pay $650 every time a new lease gets signed. And I pay $250 every time a lease gets renewed. My actual management fees come out to more like 12-14%, depending on how low I can keep the turnover. You should be budgeting at least double, and possibly triple this.
  Miscellaneous & Reserve $1,200 Oh come on, this is insulting. $100 a month for capital reserves and incidentals on a 90 year old, 8000 sf brick building? 
• What about snow removal? Landscaping? Pest Control? Tenant turn costs? Some kind of basic security system (even a door buzzer?) Legal fees for evictions? etc., etc., etc.  
• I would also note they have you putting down 30% and amortizing out 30 years at 5% to get that low monthly P&I payment. I would expect that you will want to put down less, you will get offered amortization at 25 years max, and the interest rate is about right. With 20% down at 25 year amortization and the same interest rate, you are right at $2900, $470 a month higher than what they use for their calculations. 

This might not be the worst deal in the world, but when I run it through with more realistic numbers, a lower down payment and shorter amortization, I get before tax cash flows of maybe $7000 a year, cash on cash of about 5%, and a cap rate below 7 - and that's assuming you don't have immediate capital expenses to worry about, which is probably not a great assumption going by those pictures. Is it worth all the headaches of dealing with an old class C property in a class C/D neighborhood for that kind of money? Are you even going to be able to find a decent property management company that wants to deal with a small property like that in a neighborhood like that? 

If you don't have a real strong knowledge of the neighborhood and whether or not any of the rosy projections about the Obama library and new park are actually going to bring prices up, you are just hoping that it appreciates with no guarantee. That is a loooooong way from downtown Chicago. And if you don't have a good knowledge of the neighborhood to know if there is demand for nice apartments, you won't know if you can make improvements that will create a return, or have a sense of whether or not you can keep vacancies down. You need a real strategy to add value, decrease expenses, and increase rents on a property like this, because as it stands it's an overpriced dud.

@Andrew Syrios Here are a few in progress shots. Mostly it just looks like untaped drywall right now. We'll have professional photos taken when all the finishing touches are done and the place has been properly cleaned.

Things are rocking and rolling now! The difference between working in Boston and Texas is staggering. @Adriel Hsu continues to do a great job managing this project for me.

• Plumbing for garage apartment completed: (Washer and dryer box, new tub installed, fridge water line installed, dishwasher connections setup)
• 5 of the new windows for the house installed (Other 6 are special order and 2-3 weeks out)
• Electrical re-wire of main house completed and passed rough-in inspection
• Completed all the exterior siding repairs
• Installed new wall insulation on parts that needed it
• Hung all sheetrock in both the main house and garage apartment

Upcoming: Walls floated, taped and textured. Fix leak in garage apartment to get water turned back on. Pressure test gas system in apartment.

Unexpected: Decided to replace all the remaining windows since a couple of them were broken and with everything else being updated they were going to stick out as old and ugly and drafty. That adds another $3800 to the bottom line but hopefully I'll get some of that back in a higher appraisal and it will also likely help get and keep quality tenants.

One other thing to discuss for the good of the community is the capital burn rate. Adriel and I had a plan with several draws for work done at various stages, but it has been hard to stick to that as some trades are going faster than others and we've blown through the entire contingency budget and then some. The work is also going much faster than I anticipated. That's not necessarily a bad thing, but it's causing me cash flow issues since much of my working capital is tied up in my 1031 account while I wait for another property to close (and that lender is taking forever getting the paperwork processed). Apparently I can't take any of my boot money until all of the deals on my 1031 list are closed. At this point, we've spent almost all the money I borrowed to do the rehab and we need more this week to pay the sheetrock guys.

I had a private loan for the majority of the rehab but the plan was always to put in the last $15-$25k using my own funds, paid via the 1031 boot money I anticipated getting last month. In retrospect, I probably should have just asked my private lender for enough up front to carry the entire rehab including a healthy contingency. But I didn't, and I can't access the 1031 funds yet, so I am left scrambling a little bit. I don't keep huge amounts of cash on hand and don't like to draw my personal savings accounts down to zero anyway, so I need to go borrow some more money. I am lucky enough to be in a financial position where I have access to plenty of credit, so it's not a deal killer. But it is aggravating to have to pay additional fees and interest on borrowed money when I have plenty of my own cash stuck in an escrow account.

I have been an Amex business card holder for years and they have been sending me tons of advertising about their new business loans. So I called them up today and signed up for two products. I haven't heard these discussed elsewhere on the forums, so maybe these will help someone. One is a business loan, 6.99% interest deposited directly to my business checking account and amortized over 3 years. No points and no prepayment penalty. Because it's only a 3 year payback, the monthly payment is pretty high but it will help get me through this cash flow drought and when I refinance I can pay it off along with my private money loan.  

I also signed up for another product called "working capital." It's a revolving line of credit I can use to pay any business via ACH payment. So I can send money right to Adriel's LLC for him to pay the contractors, with no Amex charge fees. Great way to pay contractors and others who don't take credit cards when you are tight on cash. It is designed to be paid back quickly, 1-3 months, and priced affordably for very short term borrowing. It's nice to have in my back pocket but will definitely get expensive if I can't pay it back in under 60 days.

@Dustin Hood I'm just about to post another update over on the deal diary thread. 

Yes, rent to businesses. 

@Jonathan Yeh it doesn't matter what most other people are doing. It matters what is legal. You are in business now, operating as a professional. It's your responsibility to act professionally and ethically. There are valid reasons why basement units aren't legal. The neighbors don't want additional units (that's why you are worried about getting turned in). There are certainly insurance implications for renting an illegal unit. There may very well be safety problems, too.

If you want a way to use that basement space that adds income, find out what you are legally allowed to do and do that. If there is space for another unit, there is space for more bedrooms/home office/game room/luxury bathroom/kids playroom/media room/wine cellar/etc. Maybe you won't get the full amount you want, but you can get something, and probably for less than the $30k you were thinking of putting out.

If you can't make money legally, don't buy the property. There is no wiggle room on this.

If it's illegal, don't do it. Simple as that.

Don't take the advice of strangers on the internet. Go find out what you need to do from the appropriate local authorities. This is a legitimate safety issue and you should not cut any corners.

Best thing to do is swing by your municipality's building department and have a chat with the right person. In my city the rules around smoke detectors are insanely complicated and based on such things as the date of the last "major" renovation (defined by the type of permit that was pulled) and the date of the last sale of the property. As a result, no two houses seem to have the same installation. 

The safest setup would be to have hard-wired smoke and CO detectors with sealed battery backups. But that is not cheap to install, and your building may be able to be done with battery units alone (if your local authorities allow it). Even then, the sealed battery units (good for ~10 years, replace the whole thing when it dies) are generally considered safer since they don't rely on owners to change the batteries every year.

Radon is most often an issue in basements. Typically for radon you would run a test for it, then if the test came back positive you would install a basement mitigation system for ~$1-2k (pretty much a fancy fan that vents your basement). 

Are you thinking of CO? That is a real issue and a CO monitor is generally required anywhere you have combustion (gas-fired water heaters, furnaces, garages, etc.). Again, check with your local folks.