How do I evaluate this deal?? And how do I get capital?

5 Replies

Hi all!

I am a COMPLETE newby and need help figuring out if this is even possible.

I live in Central IL. I found a listing for a 46 unit set of apartment buildings on 8 acres on the edge of a medium town that is currently distressed, but rebounding. It's also within about 30 minutes of a major city with a major State university. I talked to the realtor and he shared that the place has been abandoned for about 5 years. They have a major septic system malfunction and were shut down by the health department. So we would either need to fix the septic system, install a new septic system or hook up to the city sewer system which would mean running about 1/4 mile of pipe. That's the expensive bit. It has a well that the realtor thinks is in good shape.

The property was built in 1966. In the pictures the bones look good, but I haven't seen it in person. It would require some renovation, but it doesn't look like there are major structural issues other than the septic.

The realtor didn't have data on the taxes. But he thought they would be low.

The place is selling for (OMG!) $59,000!! It seems like an incredible deal.

My thoughts are, get capital, buy the property, renovate a chunk of it to start cash flow, then keep up the renovation over time with cash flow until it's all done, then hold for retirement income!

I'm willing to make calls, meet people, paint, shop for good used appliances, find contractors etc. But I need to know if I can get the money (I really have nothing to invest at this point) and if it would be worth the work. I'm willing to work.... and I'm willing to do this slowly, reinvesting all money back into the job. I'm also a queen of finding good deals on supplies and materials.

I just need financial backing and assistance in knowing what questions to ask.

It seems like a BIG bite to chew off as our first job, but it looks like it has GREAT potential.

What questions do I need to ask? Whats my next step? Am I crazy to even look at this deal?

@Edith TenBroek Wow! That sounds like a HUGE project that would be very capital intensive.

I'm certainly not one to say what somebody can and can't accomplish because I hate limited thinking, however this sounds like too big of bite.

Ask yourself:

1. If it is such a screaming deal, why has it been available for so long and why hasn't an experienced developer/investor already picked it up?

2. At this point you might not even know what you don't know. Ask yourself if you are capable and comfortable doing a deal of this nature and size.

Raising capital being as you put it "A COMPLETE Newby" will probably be difficult because since the property sounds like an empty shell (even if the bones are good) there are no in place income streams. Your ROI numbers would be based on pro forma projections and not actual in place numbers.

I don't mean this to be a discouragement at all but you might want to readdress your thoughts on this project.

Thanks! I need to hear this type of advice. I tend to think beyond my means sometimes. It still looks like a great investment opportunity. It's seven separate buildings with both 1 and 2 bedroom apartments, so I'm thinking someone could get ONE of them up and running, then work on the others over time with the revenue from the first building. Another thought I had was you could "harvest" materials from the other units (appliances, bathroom fixtures etc) to make the original renovation more affordable. The pictures showed that some of the units were decent, while some have big holes in the walls etc.

I haven't seen it in person yet, so there are many many unknowns.

More thoughts are welcome! It's probably not going to happen, but I'd love to use this as a "what if" scenario, and learn something from it.

Think more about it, I could probably pull about $20,000 in equity from my own home, but I don't have much else to put into this deal.

I have to be honest, the amount of knowledge and preparation required for such a complicated purchase, rehab and manage is probably outside of even your imagination at this point. But lets pretend it wasnt, where would be a good place to start..........

You should begin by reading everything you can find on this site related to multifamily or apartment investing. Every free moment you have :)

Start with going to the property and taking alot of pictures and as many notes and measurements as you can think of. Get pictures of the major systems, plumbing, electrical structural etc. Get a detailed list of all the things you would want to do to the property along with some idea of what materials are appropriate for your area.

You should also walk through with a licensed contractor who can assist you with all the problems you probably aren't trained to see. They can also help with ballpark figures for the sewer system or other costly problems. Once you have an idea of what condition the building is in and what would need to be done on the renovation side you would then need to speak with a commercial broker.

You need to know what kind of rental market this property is in and you would need to put together a full proforma based on local research. At this stage this the proforma doesnt have to be complete as I am sure there are many costs you are unaware of. Often a good rule of thumb is the 50% rule; 50% of your gross income will be eaten up with operating expenses. I would also suggest touring every apartment rental in a 1 mile radius so you can get an idea of who your competition is. Call local management companies and pick their brains about similar multifamily properties.

Multifamily buildings can be alot more expensive to analyze as you will have costly inspections and reports that need to be paid before you can proceed with a purchase.

Even if you do not buy the property you will learn alot asking these questions and collecting the information. You will most likely waste alot of peoples time but its a place to start.

Another really good option is to try and find an experienced partner in your area or try an shadow an experienced multifamily investor for a couple years til you pick up enough to get started.

Hi all!

I'm not going to pursue this. Hubby talked me down! But I'm still interested in following what happens with this property. It's been on the market about 7 months. I did a search and found out the annual taxes are about $11,000 and they are current. If anyone is interested in looking at it here's a link...

http://www.zillow.com/homes/for_sale/Rantoul-IL/2110418428_zpid/54064_rid/paymenta_sort/40.452695,-87.899208,40.170479,-88.411446_rect/10_zm/3_p/

Back to reading, learning, paying down debt, and saving to buy a nice little duplex or something! :)

I also wanted to add the Realtor said (take this with a grain of salt) that the 1-2 bedroom units would rent for 350 - 500 each. Gross cash flow would be over $16,000 a month when fully up and running. Insurance is a little less than $1000 a month, mortgage is negligible.... see why I'm interested!? No clue on insurance though... I just wish I were a lot more experienced at this.

Originally posted by @Edith TenBroek :

I also wanted to add the Realtor said (take this with a grain of salt) that the 1-2 bedroom units would rent for 350 - 500 each. Gross cash flow would be over $16,000 a month when fully up and running. Insurance is a little less than $1000 a month, mortgage is negligible.... see why I'm interested!? No clue on insurance though... I just wish I were a lot more experienced at this.

If gross cash flow is $16K/month, the building is probably worth somewhere in the ballpark of $1M renovated and fully in-service.

I imagine you'd want at least a 20% equity on the deal and you'd probably run into about $100K in costs (closing costs, survey/engineering/inspection fees, lender fees, etc) to hold the project through stabilization. So, you'd need to be all-in for less than about $700K.

If you paid $60K for the property, you'd need your rehab costs to be less than $640K.

How much would it cost to run public sewer/water to the property? This is probably the biggest unknown, but if you're looking at 1/4 mile run, it could easily be in the tens or hundreds of thousands of dollars once you include all the engineering and permit fees. On top of that, if the property has been vacant for 5 years, you're likely looking at at least a major cosmetic renovation, and potentially a large mechanical renovation as well. That could easily run $10-15K per unit, depending on the scope of the mechanical, exterior and common-area work.

Personally, I'm guessing (and it's just an educated guess) the numbers don't work at $16K gross monthly revenue...

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