Short Story: Refinanced 5 single family units into a 24 unit complex.
Back Story: Purchased my primary house(105K) thru auction with a very friendly but very real loan thru my parents(70K), I was originally looking at 30k houses and this one didn't sell at auction and kind of fell into my lap. I had a couple friend that were looking for a place to stay after college as well and my girlfriend at the time was out of state, I thought what the heck this house is way to big for just me. Well 3 years later and what seems like 10 different random people living with me off and on. I owned my house out right. Well worth it but what started out as fun hanging out with friends, I ended up with complete strangers and almost feeling like a captor in my own house luckily once my girlfriend moved back I was able to take back a full paid off house and enjoy the major benefits of not having a house payment.
Single Family Residence:
Bought first one in 2010 at auction for 26,500. I only needed a small loan from parents(thanks again Mom & Dad). Took me 4 months to get ready. I painted every inch inside and out, fixed a million tiny small things, no major fixes. Got it rents for 650. Decided that was a lot of work.
2012 Bought second rental from HUD for 23,500. Learned how to put in a water heater :-), paint and some more paint. It was a smaller house(2 bed 1 bath) only got rented for $525, its currently rented at 550(same tenant for 4 years).
2014 Rental #3 - Neighbor of rental number one approached me, they were looking to down size into a trailer for some reason. 3 bedroom 1.5 bath and 2 car garage for 27,500. Had some foundation work needed but really just need paint. Rented for 750, up to 775 now.
2016 Rental #4 - Found thru Zillow 3bed/1bath 21,200- hired out the floor to be refinished, wow freshly refinished floors look amazing, proceed to do that to rental number1 after a major trashing(one of the few I've had). Paint, ants, dry rot, furnace and a/c, replacing glass in windows. Missed a bit on this one, but my goal for all my rentals is to be about 30k in and rent around 600. So I think after all of that I was in for about 31k and got it rent for 625, up to 650 now.
2017 Rental #5 - Purchased thru HUD again, got it on discount due to a sewer line I still need to replace this spring for 21,500. Holy stairs, 15 stairs just to get to the stairs to the porch, then stairs to get to the only bathroom on the second floor with both the bedrooms, laundry in the basement. Tenants are going to have calves of steel. Anyway, I feel like I kind of missed of this house just for that reason. Refinished floor more paint. Had been vacant a couple years with squatters and I guess they manually turned on the water, so I had busted water lines everywhere. In hindsight I would of replaced everything with plex piping, but 15 copper patches later we have no leaks...but that sewer line everyone told me I should of fixed right away, it backed up and flooded the basement and ruined the water heater. Rented for 630. Looking to sell if anyone is looking for a work out and a home :-)
Okay to finish up this section I never really had a realtor(last two were the same realtor and the one I still use now, she is great. But basically I would search the websites constantly for houses I thought fit me which a small criteria for me as I said above basically under 30k that rents above 600, I have always thought I would be willing to pay more for a rent ready one but never did pull the trigger on any. I never had to deal with a bank, and my loans with my parent never exceed 25k, the joy of cheap houses. I slowly transitioned to hire more things out as I discovered saving 500 dollars here and their but taking 4 months rather than 1 month to turn a property around was actually costing me money and was time consuming with a full time job and as I got more rentals just the small things that come up with them. I have always self managed and will continue on the SFR, that may change depending on how my experience with my new rental management company goes.
So I made a decision that doing one house at a time, basically unleveraged wasn't the fastest way to go about this. I had never dealt with a bank and never really bother overly much with inspections, well crash courses were about to start.
So I knew I had about 200k in equity in my SFR @ 80% value. So I started looking for multifamily units around town that I could pull my equity out to use as a down-payment for. Found 3 on the market, got the rent rolls and financial statements(if you can call what they gave me that). From those one looked fairly good, well managed on the upswing as a new owner had come in and started remodeling and kicking bad tenants out.
24 unit complex
List 565,000
Purchase Price 535,000
Gross Rent:138,000
Less Vacancy(10%) 13,830
Operating Income 124,470
Property Tax 8,837
Insurance: 6,900
Management(6% after vacancy): 7,468
Maintenance(6%): 8,298
CapEx(6%): 8,298
Water: 8,400
Waste: 2,700
Electric: 8,400(laundry room, hot water heaters, security camera's)
Cleaning(unit turnover): 1,800
Landscaping: 600
Operating Expenses : 60,301
Net Operating : 64,169
Loan Payments(100% financing): 42,369
Cashflow:21,800
24 units - 16 2bedroom and 8 - 1 bedroom lofts. Market Rate for 2 br 575 and 1 br loft 500 = 13,200 monthly or 158,400. Goal is to hit market rate on all units in 3 years.
Above is the breakdown using both his numbers, some estimates, and some actual(insurance, management rate, taxes). His numbers I was basically able to take utilities as he was in constant remodel mode I decided to use estimates for repairs/capex.
So I did a quick walked thru the property on a Thursday. Got to see some un-renovated units and a few version of the renovated units, so the laundry room/water heater room. I really liked the lay out of the apartments and the remodeled ones looked really nice, and the cost to renovated each seemed reasonable(about 2-3k a unit, depending on appliances. The numbers worked, apartments looked nice, I was pretty excited. I will say I was pretty serious when I started looking for apartment complexes but this happened FAST, I got a call the next Tuesday that an offer was coming in that night from a group in Kansas City and I need to submit something or risk losing the deal. We had mulled around a number a bit and it worked with my estimated financials so we offed 535,000 contingent on financing, I declined roof inspection(done 1.5 years ago when seller purchased 2/3rd life left) and sewer inspection. I misunderstood or they maybe didn't word it correctly but they had some one when he buy it "try" and inspect it but it was too murky/dirty to give a full report. In hind sight this is the one thing I really wish I would of done on the initial contract. Anyway offer submitted.
Got the good news the next day that the offer had been accepted. Oh god what do I do now.
Financing and insurance were first up. I might of been a bit under insured on my SFR, I got lucky to not have anything go wrong but would not suggest it. Got a very reasonable quote from an insurance broker for all my properties and the apartment complex, too easy. Financing was suggested by the seller and my realtor to start with whose his financing was thru, they had just done appraisals and it was pretty much 99% sure it would be a go with my equity. Seemed to make a lot of sense, talked with the V.P of the bank, very nice and informative. Went over financing options for getting money out of the SFR and the new loan for the apartment. Sounds good got an offer rate of 5.79%, yikes first loan shocks. Parents really push to shop around and eventually I found a local bank that offered 5% fixed for 5 years then prime +.05. Awesome lets do this. Send in a ton of paper work FEIN, rent rolls for SFS, 3 years of tax returns, 24 lease agreements, contract, p&l on complex, I gave them a 5 year plan of expected rent increase vs expenses.
Scheduled walk thru- Due diligence time. Got to see every unit, took notes. Nothing major all rentals were nice and rentable in the current state and the remodel ones looked very nice. Furnace's and A/c units were old, had a discussion to lower offer due to this but eventual relented, only the future will tell if this will cost me a bunch. All functional just like 1980 old. Some old water stains from water leaks that had been fixed but the ceiling not completely repaired was the only real thing I say.
Other things that happened:
Water line broke in a vacant unit flooding two units. Seller brought back to original condition or better. Termite inspection did find termites, seller treated.
Water heater(also from the 80's) stopped work. This one was a battle... It was 120 gallon unit that feed 17 of the 24 units(others have on demand water heaters). Seller wanted to put 3 50 gallon residential water heaters in, per suggestion of his plumber $2,200. Due to postponed closing due to financing he also wanted 1/2 the cost covered by my. After days of debating we came down to I wanted commercial units, 2 80 gallon commercial water heaters for 3,500 and I would split it or he could put in the residential at his cost and I'll replace them when they break. So Commercial I got, still cost me but since I pay for water and electric I am hoping these newer units will cost less and manager has already told me tenants are much happier with the new units.
Appraisal: Just had to meet with them at the SFR and set up the management to let them into the property. SFR came in about right where we thought. Complex appraised on cost at 560,000. Appraisal reports are kind of interesting: Comparative sales, city reports, neighborhood reports, project P&L -130 pages of information on this one property.
Put utilities into my name, require going into provide company information, slow lines and a few deposits all done.
Closing: Signed a million pieces of paper infront of a room full of people. Loans ended up being 435,000 for the 80% of the complex. 137,000 for the down payment, closing, and to repay about 25,000 to my parents. And a 75,000 LOC to tap at my disposal(rest of the equity from SFR)
Since closing last week:
I got 2 keys.
Signed Contract with management company
Made decisions on 2 units that are vacant. Remodeling one, basically just new flooring. Other going to try rent without remodel if management gets done with other unit I will have them start this one.
Called Laundry service- They provide 2 washers and dry and maintain and I get a small cut, plus I provide water and electric. Not sure its the best deal. Getting quotes for providing my own and or getting them to provide some newer units, theses are dated and not used as often by the tenants as if they were upgraded.
Overall: Took two months from start to finish and a whirl wind of what seems like constant communication between my banks and relator. Already looking for new opportunities tomorrow, as my loan left me we some unspent capital. Probably provided too much detail and still probably left out a bunch, feel free to ask any question below and I will try my best to respond.
