All Forum Posts by: Tyler Kastelberg

@Mike McGee

Mike: You might consider underwriting both assets and comparing the results. You'd be able to model the various pros and cons that you described to see what the best option might be for your portfolio.

Based on your description, the office model might have an above average growth rate given the location and less replacement reserves given the nature of the structure. Your multifamily model might have a low to stagnant growth rate with much greater replacement reserves to account for roof and HVAC replacement.

One of the great parts about commercial investing is the predictability of income. By modeling each lease, you'll be able to paint a clear picture of the risk/return profile of the investment.

@Mike Bovay

Mike: I put together a back of the envelope model that might help your analysis. You can typically run with an operating expense ratio of 50% to put in an offer. Be sure to request a diligence period that gives you adequate time to evaluate the deal (actual financials, property condition, underwriting, etc).

@Nadir M.

Two additional thoughts:

1) A central boiler is a cost trap for owners. Be sure to price the cost of decommissioning the boiler and installing HVAC that is controlled and paid for by residents.

2) Old windows can be expensive to replace, especially if in a historic district. Be sure to price this before purchase, especially if you pay utilities.

@Ryan H. Joseph David gave you good advice. I’ll just add that if you aren’t targeting a specific building, I wouldn’t do research until you know the owner is open to offers. It’s easy to waste time in this business - best to be thoughtful about your approach.

@Eric Belcea Some investors will turn to the section 8 program to lease “hard to lease” buildings. I’m a believer that there is market for everything at the right price. Consider lowering.

@Dennis Johnson

Dennis - A proforma is crucial to determine what you can pay for the property. Consider partnering with someone who has done this before. It's a great learning opportunity.

@Tina S.

Tina: Great idea! I work with a few folks who have done projects similar to this. You'll find that hotel valuations are lower (higher cap rates) when compared to multifamily. It wouldn't shock me that projects like this can produce big returns.

Side note: Before embarking on this, be sure that you have a solid development model that can accurately project the construction debt and construction schedule in the analysis.

@Chad Chism

I'm more conservative than most folks and would rather not keep a ton of debt on my properties.

Before you start looking out of state, make sure you have a reliable, trustworthy property manager in the new city. The biggest factor in the success of a property is a good property manager!

@Dennis Johnson

@Theo Hicks is nailed it. You're going to need a detailed development model as the property is currently not income producing. This differs from an acquisition drastically when modeling the debt service. If modeling by yourself, be sure to factor in a lease-up period consistent with the market and concessions that you might have to make when finding tenants quickly (free rent, etc).

Best of luck with your project!

@Blake Crawford

Blake: It sounds like you found an interesting deal! You'll most likely need development financing to renovate and stabilize the building. Local banks are your best and cheapest bet, followed by private (hard) money.

Once stabilized, you can refinance the construction debt into long-term, fannie mae or freddie mac "small balance" permanent debt. There are a number of mortgage brokers who can help underwrite this type of debt, and experienced folks can facilitate introductions for you. 

As @John L. said, rolling your deals into a portfolio loan will over-complicate the process today.

Best of luck!