All Forum Posts by: Shawn Lowery

Bob Kile at Covenant Bank

If you're getting recourse debt from a local commercial lender they often will allow you to roll rehab into the loan up to a certain % of appraised value. 75% LTC is fairly common for that size asset, assuming debt coverage is adequate. Talk to your lender. You'll have higher debt service, but need less equity raised, so you're CoC could be improved, especially upon stabilization, if the upside is great enough. Run both scenarios

Yes, premium over SFH given extra work for income analysis and rent survey verification, however, that fee is relatively steep in my experience for a 3 unit. Typically, if you're using a portfolio lender (local bank or credit union), you can request 3 bids. If it's fha or conventional you may have less control

If your return on cost and payback period for the mini split investment is attractive then yes, it could be worthwhile. You'd certainly boost NOI and thus value by passing that expense off to the tenant.

It's a significant capital outlay, so run the numbers.  Also, gauge the feasibility of space outside for the numerous condenser units.  Would they detract from the exterior appeal?  Would you have to remove the pipes/radiators/baseboard etc for the old boiler system?  Cost for that?  Factor that in.

Alternatively, could you implement RUBS to pass the heating costs back to tenants?  If a common practice in your market that's likely the easier way to go.  

Consider too how passing this expense back to the tenants might impact rental rates based on comparable properties nearby.

Congratulations on the new deal! Curious if you had any debt service constraints going in, did you have to raise additional capital due to a lower LTV, or is a bridge different than agency on DSCR? Clearly there is upside potential with that cap rate spread, just wondering how the lender looked at it with current actuals so relatively low compared to future potential.

Also, how conservatively do you model the fixed rate agency debt interest rate upon refi out of bridge years 2-3 and cap rate at that point?  

The SDA is an excellent tool.  If you plan to pursue syndication, or just purchase multifamily in general, it's top notch.  @Michael Blank has numerous educational resources to check out

Does the existing building need an injection of capital to complete rehab, and thus boost NOI? If not, I'm not sure there would be enough justification from his perspective. If it's stabilized, more capital and chopping up equity will reduce cash-on-cash and ROE. Simply paying down principal without a refi is not going to change debt service, so cash flow is the same all else being equal. At first glance, the better opportunity is put the money in play in a new deal and chop up the equity accordingly.

@Justin Fraser congratulations!  This is a great story.  Not many co-sponsors better than @Matt Faircloth.  Curious:

- after so many local meet-ups you organized, what are the best practices for material to cover, what keeps guests coming back, # of sessions/mth, anything else that helps these become successful...

- what type of financing and terms?  did you underwrite for a supplemental post-rehab?  

- 70/30 split w/ a pref? 

- what were the FAQ from your prospective investors?  what were the most difficult or unexpected questions?

- knowing what you know now, what's one thing you'd do differently for the next syndication?

Local bank (not the Wells Fargo or TD, more the community banks & credit unions). They may expect a deposit account to be setup, for the building and you personally. Deposit accounts are important to their numbers, and you may be able to use that as leverage to negotiate a slightly better rate/term. Some will allow a % of rehab to be rolled in, with an I/O component they'll just need to verify via an appraised value now and projected value post value add, if any. 20-25 yr amort, usually 5-yr term. It's all negotiable, don't be afraid to ask. They focus on long term relationships.

This was a 4-unit building neglected by the previous owner, with deferred maintenance and extended vacancy. C+ asset when purchased in a prime B+ location within walking distance to burgeoning “Main St” strip of numerous restaurants and shopping. Each unit was 2BR/1BA flats, except for one of the units having a finished basement. The rents had barely been increased since the last sale in 2013 at $338k, in a market experiencing steady rent growth. I was tipped off to this off-market opportunity through a residential agent. After a couple months of back and forth negotiations, we eventually settled on a price of $340k, or $85k/door, not bad for average in-place rents of $1000/mth w/ market rents post-rehab closer to $1250/mth.

Going in the building was generating $47,400 of gross income. We projected $55,100 on the pro forma with our actual collections now post-rehab at $57,390, so over a 21% increase in gross receipts was attained in a 6-month period. We introduced additional streams of income by renting washers and dryers and charging pet fees.

The building was financed with a recourse loan through a local bank at 75% LTC (loan to cost), meaning 75% of the purchase price and 75% of the rehab cost would be rolled into the loan. This was pending an “as-is” appraisal along with an “after-repair” appraisal, to ensure ample equity would exist in the deal post-rehab. 4.75% fixed rate for 10 years with 25-yr amortization. The after-repair appraised value was oddly issued in a range, of $400,000-$420,000, with the lender electing the low end of the range as their ultimate loan amount determinant. This was a bit below my projection, so our rehab draw from the lender was reduced. Today, similar 4-unit buildings are trading in the mid-upper $400’s.

We budgeted $67,000, which included a 10% contingency, for rehab of the interior and exterior and ultimately hit the brakes at $65,000. The bank funded $45,000 of the rehab costs, with the balance out of pocket. The full scope of rehab was not completed as we hit snags that ate into our rehab budget. The roof leaked and was replaced earlier than expected, our main sewage stack was replaced as it leaked and nearly flooded the basement with grease and sewage, bathroom rehab went over budget due to plumbing issues along with other fun surprises that slowed us down. We completed about 75% of the originally planned rehab and toned down to cosmetic improvements on 2 of the 4 units instead of a full rehab. One of the units housed an inherited tenant, with a history of on-time payment, that wanted to stay, and after some new flooring and paint, we were able to boost rent by $100/mth.

The deal was funded by a single private investor, who invested $115,000 and received 85% of the equity as they also signed on the recourse loan. The cash-on-cash projected returns were pegged at 6-7% year 1 for the investor, with a boost to 10+% post-rehab. We structured a 6% preferred return, I collect a 1.5% asset management fee, and split the remaining cash flow with my money partner 85/15. We plan a 5 yr hold before a 1031 exchange into a larger asset, depending on market conditions, or straight disposition.

Granted, I won’t retire on this one building, and I will structure distributions more to my favor as time and experience builds, however, my goal was to meet or exceed the investor’s expectations and gain firsthand knowledge and credibility in the process of executing a multiple unit rehab. I look at this as dress rehearsal for taking down a larger value add deal in the future.

Here are a few before and after photos: