All Forum Posts by: SD Young

Aloha, 

New to HML and PML. Looking to purchase a multifamily building in town. Owner and I very close to finalizing the terms of a balloon, interest-only purchase agreement. I have funds tied up through 401k / retirement account at work sufficient to cover the agreed upon down payment and some closing costs (close to $100k). Obviously, I'd rather not liquidate those funds early but am prepared to do so for this deal, as the property has value add potential and cash flow. But I would need a few months to liquidate and season the funds and the owner wants a quicker closing. Will be tapped out in the short-term after earnest money, inspection, etc.

 Recommendations? 
 

@Derek Okahashi Nicely done. 

I shutter to think of the sale price. Needs to be gutted (don't forget the floors) or simply bulldozed. 

Quick questions for the experienced out there. 

Looking at a property with a clear title. Seller owe's nothing. Seller may offer owner financing with a balloon payment a few years down the road. Seller would become the primary lien holder on title. And aside from collecting a monthly payment for a few years (and then the lump sum payment) the seller is pretty much out of the picture. All maintenance, taxes, and insurance are on me, the buyer. 

What's the best way to take care of these payments? Simple as contact homeowner insurance companies, get quotes? Or cancel existing policy? What about taxes? Just create my own account to add some property taxes in each month, and then pay twice a year when the time comes? 

Thanks. 

@Pavel Bennett 

There's more to it:  Walls and floors between units would need to be Fire-rated separations; usually two separate forms of egress (unobstructed access / exits leading outside); separate meters (utilities and water); separate kitchens, bathrooms, bedrooms; unique addresses...etc.  

Honolulu adopted IBC 2012, but you'll want to look at the Land-use ordinance too. 

Your best bet is to find a multifamily for sale in an apartment zone in town. 

Next best option is to find an already non-conforming building that doesn't need much work (if it's in a residential zone). 

You can do new builds of multifamily buildings in residential zones if the lot is large enough for "Cluster" and "PD-H" housing applications. I know the minimum for PD-H is an acre. 

Just curious, are you very familiar with Oahu?  Owning multifamily properties in some neighborhoods comes with it's own set of problems.

Hey guys, I'm quite interested in a specific property here on Oahu. It's dropped in price but still expensive ($mm). I think a lower price is reasonable, as the home is old. Getting a capital partner on board may be a challenge, because it's in the shoreline management area, so the holding time to get the permits may be longer than a partner is comfortable with. Maybe there are other options... 

Perhaps I could secure an interest-only mortgage for a few years (with a balloon payment), but I would need to refinance after a year or so (once I get the SMA application approved). The idea being I would refinance the loan into a renovation loan, with the end goal to transform into 4 condos. There'd be instant equity by that time too (the property is already undervalued). But I'm doubtful that interest-only loans would be on the table during this uncertain market. 

So maybe the owner would consider a contract for deed deal? Maybe they would be interested in getting the monthly income and avoid the increased tax burden for a few years. But that's a challenge too, as I discovered the owner lives on the mainland, and is quite elderly (living with one of the children). Interested in any advice. Thanks!

@Lane Kawaoka I agree it's sad. I drove through Waikiki the other day,  it's depressing. Boarded up windows on several properties. Not a lot of foot traffic. I made it a point to dine at one of the restaurants, and there was only one other customer seated. Limited menu, one server.  With unemployment over 20%, it's going to be a slow recovery I fear.  

@Pavel Bennett You won't find much resistance if you're acquiring a nonconforming multifamily property. But if you plan on renovating it, then pulling building permits and getting inspections could be a problem. You could risk doing it without permits, by just contacting local contractors, but if you're caught, there are daily fines, etc. 

Parking is a big issue too. Code requires at least two spaces per unit. But you might be able to make that work with tandem stalls, or compact stalls (50% of the required stalls can be). As @Christian Cramer mentioned, someone will likely complain if you've got six cars parked on the street suddenly showing up that weren't there before. Make sure your site can accommodate the parking and trash requirements.  

Another thing to consider is your exit strategy. If you're financing this with a loan that requires the balance paid a few years later (balloon mortgage), then rentals won't cut it. You'd have to sell them as condos. So you'd have to go through the CPR process. 

I'm also looking at similar deals here. Lots of potential, but lots of red tape.
 

@Michael Borger Leeward side also has the stigma of being more prone to criminal activity, though sadly, the whole island seems to be having a rising amount of that over the last few years. I would imagine if you're renting units out on that side, you are offering lower rents than market rate elsewhere on the island. Are you planning on selling the homes?  

 Makaha would probably be good for some vacation unit cash flow (back when AirBnB was still legal), but unfortunately this is no longer an option (due to our bubbling politicians).  

@Christian Cramer Yes, it's true that it would be easier to develop another property outside of the SMA first. But opportunities don't always present themselves, and this property has a lot of potential (and given its proximity to future development plans). I think given the current market uncertainty, there could be some flexibility in the purchase price too, so an acquisition could be worth it in the long run (even with some hoops to jump through in the meantime).  

@Duc Ong Hawaii properties are definitely high risk, but I agree the returns can be substantial. 

Were I to pursue this project, it would be a limited partnership deal. My role would be to design it, then act as project manager of the consultants, and ultimately manage its construction (basically what I do every day with the firm). And I already have those working relationships. But I'd need a capital partner for the acquisition and closing costs, along with the fees associated with the SMA application / building permit (approx. $200k).

The financing would likely be easier to obtain if it were an owner-occupied purchase. Once the SMA hurdle is cleared, (about 5-6 months of red tape) and the building permit obtained (this could be expedited with a third party but that's more out of pocket money). While this is happening, the team would be finalizing schedule and construction docs. With the building permit acquired, the loan could be converted to a renovation loan (up to 4 units if using FHA). Construction would commence (8-9 months). Community documents / property management finalized while managing the construction. Ultimately own one, then sell the other three. Comps suggest each condo could sell for at least $2mm. And these would be oceanfront, so likely more. Given the total hard and soft costs involved ($3.5-$4mm based on projects I've worked on in the past) the potential return would be (conservative estimate) around $2mm.

Anyone have any insights / experience about the above? The SMA is the biggest risk, but in a worst-case scenario (the SMA permit is denied) the house could still be renovated (it's not in good shape) and sold. The seller already dropped their asking price $100k. With equity and renovations, it then becomes a flip project. Not as lucrative, but still a nice return when the market rebounds. Thoughts?