Last year, I shared my experience upgrading from a duplex to a 33-unit out-of-state property in South Carolina. You can read the original post here. One year in, I thought I’d like to share the ups and downs of managing an out-of-state multifamily rehab project in another long post.
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Immediately Following Closing
After catching my breath from a hectic run-up to closing, it was nice to take a walk around the property with the property manager, give them keys, and discuss plans. I didn’t intend on being in town too often, but wanted to build some relationships since this was my first project in SC.
The building was a bit more than half occupied. The immediate action was to notify existing tenants of the sale and how to pay rent going forward by placing notes on doors. (The previous owner didn’t use email and didn’t have email addresses for any tenants).
A few tenants continued paying the previous owner, but we had a good relationship and he passed along rent to the property manager until tenants got used to things. Some tenants appreciated they could begin paying online, while others continued with check payments.
As we talked with tenants the first day, a few already started making excuses about being unable to pay rent due to other bills. It was nice to see how well the experienced property manager pushed back on tenants, avoiding getting into the tenants’ stories.
The property had a bad reputation for providing extremely basic units. For example, there were no closet doors, and tenants had to bring their own appliances. We let tenants know to expect work happening around the complex; some tenants giggled, others were just surprised.
Related: How to Improve Your Odds of Scoring a Loan With a Private or Hard Money Lender
Getting Construction Started
The units are spread out over six buildings on one piece of land. I wasn’t local and needed to be very clear what I expected from the property manager. I had to rely on my eyes on the ground (contractors, bank inspector, and property manager)—good relationships are important.
The property manager and I broke out construction into buckets:
- The 2-bedroom building: Some units still needed electric wiring completed, some needed plumbing and sheetrock, and all 7 units needed finishings.
- The four 3-unit building: Gutted to the studs on the inside and would be the biggest chunk of work (“the shell building”).
- The 1-bedroom building: Mostly occupied, with one vacancy.
- Other buildings: Mostly occupied, although units needed refreshing.
- Two of six roofs were quite old and would need replacing.
I already had construction estimates from contractors prior to closing. I didn’t select the cheapest contractor, but his prices were reasonable and he was local (using someone local was important to try improving the reputation of the property). The challenge here was the majority of the units needed rehabbed when the contractors gave original estimates; however, the previous owner rehabbed and rented a few more units after estimates were given, so contractors now had a smaller scope of work and wanted to re-bid on the project.
Well, the contractor I liked now wanted much more money per unit—so much more, it would have exceeded my original budget to renovate fewer units. I’m guessing he just changed his mind about wanting the project, so I had to find someone else.
My new property manager was doing well, so I went with the contractor he recommended. This should have also made it easier for me to manage remotely since they had a pre-existing relationship. The manager warned me the contractor did work a bit slowly, but he really wanted this job so we gave him a chance. He wanted to build a long-term relationship and knew I had a timeline of under a year for the scope of work.
We decided to put the new contractor on the 2-bedroom units since those were closest to completion, and we could start pulling in more rent faster. We asked a local maintenance person the property manager knew to turn the vacant units in other buildings aside from the shell building; he would make some upgrades such as new carpet, install closet doors, new paint, etc. The maintenance person also became the landscaper and has been doing well.
Construction Phase I: 2-Bedroom Building
The contractor pulled permits and got moving on the 2-bedroom building. We discussed payment schedules, and he agreed to receive three draws (three progress payments once agreed-upon milestones are met)—one draw after finishing 2 units, another after 3 more units, and the balance upon completion. Getting contractors to agree to take funds based on the bank inspector’s assessment of progress provided another set of eyes on the ground for me to validate work actually done and removed me from deciding when enough progress had been made to warrant a progress payment.
The contractor said it should take around two weeks for each draw.
I went down to South Carolina after two weeks to check on things. I figured if there was a problem, it would be better to identify it early. Well, the team wasn’t quite ready for that first draw yet; that would take another two weeks. We revisited the timeline. The contractor really wanted to do all the work at the property, so I let him know he’d need to stick to agreed-upon timelines or I’d need to hire another contractor to take on other parts of the project, such as the shell building.
Two weeks later (four weeks total, two weeks behind the original schedule), the first draw was flawless. He submitted an invoice, I requested a draw from the lender, and the lender sent an inspector to the property and confirmed all the work for the first draw was complete. The bank wired money to me, and I sent a check to the contractor.
The rest of this construction phase went like this:
- Draw #2: Work was supposed to take two weeks.
- I visited one-month later, and the work wasn’t done.
- We had the same conversation about timelines, and I was assured everything would be completed within two weeks.
- My property manager continued updating me by phone, sharing warning signs that progress was incredibly slow.
- Two weeks later, I visited again, and no progress was made at all since my last visit; of course, we had a much stronger conversation at this point.
- Draw #2 finally happened about two weeks later (12 weeks from the start of construction, eight weeks behind the original schedule).
- By this point, my property manager was bringing other contractors to bid on the 3-bedroom shell building; we needed to show the contractor I was serious about engaging someone else to do the work he couldn’t complete on schedule; the contractor had a large team, but clearly they were more focused on other projects.
- We also needed a backup plan since the companies that previously submitted bids weren’t interested in taking on just once piece of the work at the property.
- Draw #3 happened approximately four weeks after draw #2 (10 weeks behind the original schedule).
Construction Phase II: The Shell Building
This phase actually overlapped a bit with Phase I. Since the interior was gutted to the studs, we needed an architect to draw up plans. A local architect was engaged during Phase I.
Here’s how that went down:
- I met the architect at the property on one of my visits and walked him through the building.
- Since I had to get new plans anyway, we decided to carve out space for a laundry room from one of the units; this would provide added revenue and an added amenity.
- The units were actually 4-bedroom units previously, and we decided to knock down most of the framing between 2 bedrooms to create one large master, with a walk-in closet; this would stop tenants from cramming too many people in the units; 4-bedroom units rented for the same as 3-bedrooms in that area.
- Other than the laundry room and larger master bedroom, the layouts mostly remained the same.
- The architect wasn’t happy about the layout since he felt an oversized hallway upstairs wasn’t needed, but we agreed to preserve it as-is to save construction costs from re-framing.
We had preliminary plans that the city needed to review, and that was enough to get a more accurate cost estimate from contractors. However, most contractors still weren’t interested. It was also glaringly obvious the current contractor wouldn’t be able to handle this job on a timeline I could accept. I was on a deadline with a one-year loan and needed to allow a few months once the building was at least 90% occupied to refinance.
I eventually got a referral from a BiggerPockets colleague to a contractor. We went back and forth negotiating for a while and eventually agreed on a price much lower than budgeted. (Having an architect’s drawing helped eliminate some uncertainty on the contractor’s side.)
We signed a contract my lawyer drew up, and I gave him the drawings, which the city had now approved. We agreed on a timeline with incentives. If the whole project was completed in eight weeks, the contractor would get a nice bonus. There were smaller bonuses if it took 10 weeks or 12 weeks. I felt much more confident in this contractor; he mostly worked new construction building single-family homes, but also had commercial experience renovating apartment buildings, churches, and schools.
On my way home to Philly, I tied up a few loose ends:
- I called the contractor who worked on the 2-bedroom building and informed him he wouldn’t be getting the big part of the project; he was disappointed, but understood.
- He did agree to replace the two roofs at the original price he quoted and said it would take about two weeks (I fully expected and planned for a delay here).
- He also provided a quote to resurface the parking lot and said that would just take a few days.
- My property manager and I started getting other quotes right away, expecting a delay.
- The savings from the lower price of the shell building allowed room to resurface the parking lot.
I only needed to visit the new contractor once to see the quality of his construction. He communicated well with me, calling at least every third day to tell me how things were going. My property manager validated everything he told me, and the inspector sent by the bank was the unbiased middle person who decided how much work was done. Progress payments were made according to the milestones we agreed upon, only when validated by the inspector.
Early on, it appeared he would meet our aggressive eight-week timeline, but as construction went on, we both realized 12 weeks was still a bit aggressive. All in all, it took him about 16 weeks before units were move-in ready.
There were a few surprises:
- My contractor had a few extra costs for things like replacing staircases, but he absorbed them without a change order.
- The city required me as the owner to turn on utilities in my name (my LLC’s name), but I managed to do that over the phone after some sweet talking.
- I actually have a virtual assistant do that now, since I’m often turning utilities on or off, and nobody likes calling a utility company.
- When it came time for bank draws, the inspector stopped making appointments and started just showing up; this meant my contractor wasn’t always around to clarify any discrepancies.
While all this was happening, the maintenance person continued turning other units as they became vacant, improving flooring and other easy things like paint. The property manager had no problem quickly renting any of the units. We advertised newly-renovated apartments with appliances, but some tenants still brought their own appliances since the building had that reputation. The other work below overlapped a bit with this phase.
Phase III: Roofs & Landscaping
The roofs that were supposed to take two weeks actually took 10, but that was fine. The original contractor worked on that while the new contractor worked on the shell building. The original contractor also agreed to hold off receiving payment until the new contractor reached one of his milestones—this allowed us to do a single bank draw for both contractors.
After the roofs were done, I asked about starting the parking lot. I heard a lot of excuses for a few weeks, and we engaged one of the other contractors instead. I wanted to help the original contractor wherever possible since his prices were extremely good and he did quality work (this is rare), but the more deadlines he missed, the more work he lost.
Phase IV: Wrapping Up Construction
The original contractor wanted some more work, and I had a bit of room in the budget. We came up with “quick and easy” ideas such as landscaping and installing a BBQ area and benches, but I was running out of time. The contractor quoted a great price. The improvements would have made tenants happy, but I didn’t believe any of his quoted timelines, and other contractors wouldn’t do the same quality of work for anywhere near his prices. We narrowed the scope significantly to just installing some shrubs in front of buildings for “curb appeal” when it came time for the appraisal.
Since we saved money on the shell building and didn’t need to pay a bonus to that contractor, I decided on three last things:
- Install a security system.
- It is a low-income property with a bad reputation, but it’s extremely rare anything bad ever happens there; security cameras can still help with perception and prevention nonetheless.
- This also proved useful to put my mind at ease when recent hurricanes passed through the area (uneventfully for this property, thankfully).
- Turnover a particularly bad unit.
- One unit that became vacant was in especially bad condition, and I asked the contractor who rehabbed the shell building to turn that unit.
- I could have asked the maintenance person to take care of it for less money, but I wanted to reward the contractor who took care of the shell building; he did such good work for a decent price without any change orders despite some surprises, and we’re both trying to build a relationship for future projects.
- Re-brand the property.
- We changed over to a new name to show it’s better-managed now; the property manager did a solid and installed the sign I ordered himself.
In the end, it took slightly over a year to complete this project. There was some heavy travel until a solid team was in place and relationships built, but things have settled down. Thankfully, I now have a great team to execute the next project on (or ahead) of schedule. The property was effectively refinanced out of the hard money loan by a local lender in SC. The property actually appraised 18% higher than originally projected by the appraiser the first time around—and 7% higher than my initial projections.
This article is long enough, so I won’t get into details of how managing the property day to day is going. I will say the building is full, and when turnover happens, units get rented quickly; the new laundry room is adding a slight increase to revenue. Although rent collections can be slow at times, I’m thankful for a good property management company that understands what I expect of them, stays on top of maintenance, and keeps me informed. I plan to do it all over again next year, but will likely syndicate that deal.
What do you think of this deal? Have you run into similar issues with your rehabs?
Weigh in with a comment!