Financing Repairs on Inherited Property

Member since 2021 · 2 posts · 3 votes

Hi BiggerPockets community,

My family is inheriting a 6 unit multifamily in Chicago from my great uncle. With his old age he unfortunately failed to keep up with building maintenance and rented the units for $425 a month. There's a large pile of renovations that need to take place (foundation lift, roof repair, windows etc...).

I see it as a great opportunity to restore it to a functioning rental property, especially given that there is no outstanding mortgage. I have local property management lined up to address the tenant problems and help with renovation.

I'm looking for some advise on how to finance the initial renovation cost. I am considering a HELOC. If I went that route does anyone have recommendation for Chicago HELOC lenders?

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John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

@Mantas Motekaitis this is a fantastic opportunity for you and your family for sure. I think the big question you need to answer here is how much rehab needs to be done, and do you have the right team to turn the building around. Rehabbing these older buildings can be challenging, and its not cheap. I also would caution you and your family to have a discussion about roles and compensation internally. If there are multiple family members involved then it gets very complicated. Multifamily is not actually passive, and someone will need to be engaged in the property even if it is just managing the manager. This can lead to resentment if you don't get ahead of these issues.

The other thing to consider is that your family is now inheriting the stepped up basis. If you sell and split proceeds then you could each do what you wish. I would ask yourself if this building in the area you would choose if you were starting from scratch?

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Benjamin Seibert
Investor · Frederick, MD · Member since 2016 · 352 posts · 194 votes
5y
@Mantas Motekaitis a HELOC can be tough to get sometimes on a non-owner occupied. You could cash out refi if there is enough equity in the deal. You could also consider trying to get a personal line of credit or credit card with 0% APR for a year, rehab the property, and then refi the property to pay it off. The key would be to pay off the credit card in time though. Just some thoughts
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
5y
@Mantas Motekaitis this is a fantastic opportunity for you and your family for sure. I think the big question you need to answer here is how much rehab needs to be done, and do you have the right team to turn the building around. Rehabbing these older buildings can be challenging, and its not cheap. I also would caution you and your family to have a discussion about roles and compensation internally. If there are multiple family members involved then it gets very complicated. Multifamily is not actually passive, and someone will need to be engaged in the property even if it is just managing the manager. This can lead to resentment if you don't get ahead of these issues.
The other thing to consider is that your family is now inheriting the stepped up basis. If you sell and split proceeds then you could each do what you wish. I would ask yourself if this building in the area you would choose if you were starting from scratch?
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Jason Shackleton
Investor · Ontario · Member since 2015 · 486 posts · 250 votes
5y
Hey @Mantas Motekaitis

Usually the best thing to do is refinance your primary residence to fund a renovation like this on a rental property. The reason for this is because this is your cheapest source of money. However you mentioned having other family members that have also inherited the property with you. That being said you are going to want to keep everything equal and access capital through the rental property. This way all owners share in this risk equally.

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Jonathan KlemmBusiness Member
Moderator
Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
5y
@Mantas Motekaitis - That's too bad to hear about your uncle but exciting news about the property. Where exactly is the 6 unit building located in Chicago?
I'd second just making sure you are on the same page with your family. If not, it'd be better if you buy the rest of the family out so there are no issues down the road.
It will be harder to find a lender to do a HELOC on investment property but there are lenders out there. There are actually a couple of posts that have a ton of good lenders. Here is one that I saved: https://www.biggerpockets.com/...
Make sure you build an awesome team. Happy to help feel free to reach out.
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Mantas Motekaitis
OP
Member since 2021 · 2 posts · 3 votes
5y
Thanks everyone for your thoughtful responses.

I did not realize that a HELOC is harder to obtain on a rental property. Why is this? I have also realized that property taxes will significantly go up since my great uncle will no longer live there, thus removing his senior status and owner-occupied.

@John Warren @Jonathan Klemm The property is located in Bridgeport. I think the neighborhood is growing in popularity, to me it seems like a promising neighborhood to invest in. I'd be interested to hear what others think.

@Benjamin Seibert One of the things that is difficult for me to understand is the amount of equity in the property. The mortgage was paid off long ago and the property is assessed at $383,000 by the city for taxes. Is this number safe to assume as equity in the property or will the bank come and appraise a different value when determining a LTV?
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