Follow my journey with multifamily purchase #5.

Follow my journey with multifamily purchase #5.

Boston, MA · Member since 2017 · 95 posts · 102 votes
Follow my journey tracking progress on multi family #5. This thread will discuss the steps I have/will take to make my most recent real estate acquisition successful. Let me get you up to speed. Here's what's happened so far: - got a call from a broker that had an off market deal in the Fort Hill section of Roxbury (Boston) which was steps to the orange line and less than three miles to down town. - existing 3-family brownstone with a large walk out basement which was partially finished. Owner asking $950k. 3,800 gross square footage. - told the broker to set up a walk through and I asked my long time general contractor to meet me there to identify any deal breakers. On my renovation projects I typically gut the entire building down to the studs so I am looking for really big items (e.g. foundation falling apart, pervasive insect damage,etc.). - the building had been sitting vacant for nearly a year. Lots of water damage, super ugly, terrible floor plan, junk from previous tenants everywhere. In other words...EXACTLY WHAT I LOOK FOR! Value! --I run Numbers with my contractor on the sidewalk. He is thinking around $525-550k in Reno costs (excluding appliances, attorney/architect fees, and building permit). - put in an offer at $875k. I would pay asking but figured I'd give it a shot. Ended up being another offer at full asking of $950, so I bumped my offer to $960. My broker had a relationship with the seller so that was enough to get it done. -- called my bank the next day and told them what I wanted to do. Four 950 square foot units; 3- beds, 2-baths. Total gut job. High end looking remodel. 600k in total projected renovations which they would finance. I am a pretty good customer of theirs with nearly >$3 million of outstandings with them and have a track record of success. Within a week I had approval for a $720k loan for purchase and $600k in financing for renovations, pending the appraisal. --$3000-$3300 per unit per month. 12-13k total rent per month. Total free cash flow of 4-5k per month. -- got as-built plans from the previous owner and started marking them up in Microsoft Paint to show an optimized floor plan. Called up my architect and let him know that he has another job bringing my vision to life. I'll have a separate post on how we came to the current floor plan. -- bank ordered the appraisal. Needed to come back at just under $1.8 million to get what I wanted from the bank. Researched comps and put together a excel spreadsheet to give to the appraiser which maps to that $1.8 million valuation. -- engaged a zoning attorney to help me with the variances needed to do what I want to do with the property. -- appraisal came back today...$1.8 mil. Bam! We are off to the races. Close end of September. I am pumped. Another deal closer to retirement.
7Reply
147 views

Most Popular Reply

Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
9y
Ari Goldschneider I love reading about investing in expensive markets. Putting 1.6 million into a 4 plex seems odd to me, but I imagine that in your market, that is the biggest multi family you could get with that amount of money. Anyway good luck. I imagine this as more of an appreciation play than anything?
See this reply in the discussion

53 Replies

Jump to latestLatest
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    9y
    Originally posted by @Account Closed:

    Property p&l below. I assume no vacancy (there never is) nor property management costs (I self manage). 

     I have seen the $0 cap expense new building approach used before but I do not really understand it as the lifespan on everything starts depleting as soon as installed.  By not taking into account the cap expense from the moment the lifespan starts you will be back loading the cap expense and have not allocated the incoming income to address it.  So what you will have is a very good on paper profit after rehab but a terrible profit basis as the items get older and need replacing (because the costs were not evenly distributed).  It presents an optimistic cash flow projection that can cause issues later.  If I were projecting profit on this RE in my market I would subtract $900/month for my cap expense estimate which would still leave you a cash flow of $2798 not including principle pay down (substantial on this size loan plus the down (second) also has interest (and principle pay down) on it).

    This one issue aside, it looks like a fun and profitable project.

    Good luck

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Dan Heuschele - fair point on the Capex, albeit $11k per year seems a bit excessive.
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    9y
    Originally posted by @Account Closed:

    Dan Heuschele - fair point on the Capex, albeit $11k per year seems a bit excessive.

    It does seem that way but a couple/few years ago I populated spreadsheets on 3 representative units that I owned.  I put in cost of replacement and a min and max expected lifespan.  I used the midpoint of the lifespans.  My units came in from just a bit below $250 to $300/month estimated cap expense.  The kitchens has an over $40 month cap expense (going from memory I think it was just short of $50/month).  I posted my results on BP San Diego forum for comment.  Mostly I got that my numbers were higher than people expected and that most of the people replying had never gone through the exercise.   The few that had performed similar exercise typically were on condo boards and had to do this exercise for some reason and those people were not surprised by my numbers.

    So I believe my numbers to be as accurate as I can forecast but I have had some surprises such as I still have a working 1956 furnace (In San Diego where this unit is located the furnace gets used less than 30 days a year).  I also just replaced a water heater from the late 1980s (it lasted >25 years).  Both are/were above my maximum expected life but then to counter I have also had items for one reason or another that did not make my minimum expected life.  Maybe it balances.

    CA has recent water heater regulations that resulted in cost to code using licensed plumber of $1200 for a decent water heater and installation.  I could get a handyman to do it for much less matching current install (i.e. not to current regulations).  I use 10 to 15 years for water heater lifespan so $8/month for its cap expense when installed to code using a licensed plumber.

    Flooring, paint (interior and exterior), appliances, roof, fences/walls, windows, furnace/HVAC, hardscape, siding, foundations, kitchens (cabinets, counters, sinks, etc.) , bathrooms all have lifespans and all add up.

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    I close on the property on Wednesday (9/27) and already have the building permit issued to demo the entire building and dig/pour a new basement slab for the garden unit. I had a call with my zoning attorney and architect today to map out how to streamline the renovation process while waiting on zoning approval to change the building from 3 to 4 units. Here is what we are going to do: - Shortly after demo commences my zoning attorney will file for an amended building permit which will enable us to do our "by-right" work (I.e the stuff that does NOT require a zoning variance). The stuff we can do by right includes: renovating the garden and first floor units in their entirety; and renovating the second and third floor units into a two level single duplex style unit. We can also build out the roof deck. - When we receive zoning approval for the fourth unit, we will apply for the building permit to separate second and third floor duplex into two units. This will just require some minor additional items. - by doing things this way we don't slow up the construction process as zoning approval could take 6-9 months! I will post before and after pictures of the demo as the project progresses, as well as finalized plans.
  • Investor · Natick MA · Member since 2014 · 214 posts · 118 votes
    9y

    Hi @Account Closed Seems like a great project and you picked a great area.

    Who is your attorney, if you don't mind sharing? We have a new build coming up in Dorchester and looking for a zoning attorney.

    Thank you

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Enis Shehu - John Moran, Alpine Advisory. He knows everyone in ISD and has connections within the zoning board of appeals.
  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    We are on record! Demo and clean up starts this weekend! As-is pics will be posted later today. Get ready to see something UGLY!
  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y

    Closed yesterday. Had my photographer go out and take pics prior to demo. Here is what we are working with:

  • Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
    9y

    Good looking building!

  • Investor · Louisville, CO · Member since 2017 · 10 posts · 4 votes
    9y

    Well done! Thanks for sharing

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y

    Demo has begun...

  • Real Estate Agent · Windsor, CO · Member since 2016 · 133 posts · 27 votes
    9y

    @Account Closed I would love to hear how you get the valuation you are looking for from the appraisal! Here in Colorado, finding 5+ unit multi-families that are similar are very hard to find for comps. Do you find these comps from your MLS or do you find them in LoopNet?

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Hi Melissa Harris - I find my comps on mls and look at valuation two ways. 1. How does the building comp out to other similar buildings? In Boston there are typically pretty decent comps although sometimes you have to look in different neighborhoods from a location standpoint but have similar demographics and rental cost. For example, this part of Roxbury (Fort Point) would comp to Mission Hill and JP but not further south and east towards Dorchester as it is further from the T and rent is less. 2. The other valuation metric I use is to see what the building would be values at if I sold each unit as a condo. To get to that value I look at condos in the area mentioned above. Regarding how I get the appraiser to my number (which is typically reasonable and based in fact) is by doing a few things. A. ALways be there at the appraisal and pitch to the appraiser what value you think it should be and why. Casually bring up that value as many times as possible while you walk the home with them. Walk them brought your valuation methodology. B. Give the appraiser a spread sheet with the comps you think are comparable and how those comps and the map to your valuation. Again- the more the appraiser sees the valuation you are looking for and that it is supported in fact, the better I also like to follow up with a call/text/email stating the valuation you think it's worth and to offer to have a discussion if he isn't getting to that number. Valuation is very subjective and the same data could produce valuations that are 20-30% apart. In other words, the data could support both a 1.5 mil valuation and a 1.8 mil valuation. As the owner/developer you want to put the birdie in the appraisers ear that they should be on the high end of that range.
  • Real Estate Agent · Boston, MA · Member since 2016 · 65 posts · 32 votes
    9y

    OMG those green sinks!!!

  • Investor/Contractor · Moore, SC · Member since 2017 · 54 posts · 28 votes
    9y

    This is an awesome thread. Thanks for sharing! 

  • Real Estate Investor & Consultant · Los Angeles, CA · Member since 2016 · 620 posts · 386 votes
    9y

    Great start on this @Account Closed ! All the best!

  • Sun Prairie, WI · Member since 2013 · 150 posts · 69 votes
    9y

    wonderful and informative thread. I always enjoy learning when someone is so forthright about everything. Makes it easier. 

    There is some beautiful character in the building. Do you plan on keeping it?  The outside is gorgeous. You don't find anything like that in my area. 

    Please keep sharing!

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Jennifer A. - the exterior will largely remain the same and the interior will be gutted 100%. The building used to a b single family and there is a large stairwell right in the middle, less than ideal for optimizing floorplan. Demo is nearly complete (my guys are so fast!) and now that the walls are opened up I am meeting with the engineer on Monday to figure out what we need to do from a structural perspective (i.e. Weight bearing beams and walls) to bring my vision to life. Will post pictures of the blank canvas shortly. Any other questions, feel free to post in the thread.
  • Natick, MA · Member since 2013 · 86 posts · 47 votes
    9y

    Ari, this is excellent, thanks for taking the time to provide such an in depth behind the scenes look at your project.  

    Sorry to go back to the #s but I had a quick question regarding the Pro Forma. I noticed you had a line item for "Annual 2nd Mortgage Interest" (I assume this is for a LOC). The $15,750 payment is only accounting for the Interest payments on that loan. Eventually you would need to make principal payments on that 2nd loan (I believe after 10 years?) so I was curious how you were planning to account for the principal balance on that LOC especially if this was a long term hold for you? Are you planning to eventually cash out refi to pay off the HELOC balance? If it appraises post-reno for 1.8mm then a new loan at 75% LTV doesnt leave much cash left over to pay back the LOC balance.

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Nick Foundas - the second mortgage is actually on one of my other properties. It will likely just convert it to a term loan with p&i.
  • Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
    9y
    Originally posted by @Account Closed:

    Jennifer A. - the exterior will largely remain the same and the interior will be gutted 100%. The building used to a b single family and there is a large stairwell right in the middle, less than ideal for optimizing floorplan.

    Demo is nearly complete (my guys are so fast!) and now that the walls are opened up I am meeting with the engineer on Monday to figure out what we need to do from a structural perspective (i.e. Weight bearing beams and walls) to bring my vision to life.

    Will post pictures of the blank canvas shortly.

    Any other questions, feel free to post in the thread.

     I am assuming the property is already zoned properly ,as you've stated is used to be a single family. Here is Philadelphia it is just so darn difficult to get rezoning.

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Lana Lee - yes. Used to be a single family. Now zoned as a three family. I am trying to split two level third unit into two units. It's not a given that it gets approved by the zoning commission but my attorney believes it's more likely than not. I've looked at previous cases brought before the Zba and they have approved similar projects before.
  • Philadelphia, PA · Member since 2017 · 364 posts · 109 votes
    9y
    Originally posted by @Account Closed:

    Lana Lee - yes. Used to be a single family. Now zoned as a three family. I am trying to split two level third unit into two units. It's not a given that it gets approved by the zoning commission but my attorney believes it's more likely than not. I've looked at previous cases brought before the Zba and they have approved similar projects before.

     Are you going to wait till you get approved for rezoning and then start renovation ?

  • Boston, MA · Member since 2017 · 95 posts · 102 votes
    9y
    Lana Lee - no full steam ahead. Demo is nearly complete. We will pull a permit do start construction with work we can do by right (I.e without variance) and then after that is issued we will apply for alteration to the permit for the 4th unit which will be denied and then kicked to zoning. This way work can continued to be done while we wade our way through the slow zoning approval process.
  • Property Manager · Phialdelphia, PA · Member since 2017 · 511 posts · 627 votes
    9y

    @Account Closed

    Hi Ari,

    I recently had to get a variance for a single house that I wanted to use a duplex in Philly. The process is not hard but it's long and tedious. It takes at lease 3 months to go through. You won't be able to use the building as a 4-unit until you have your variance. If you get a "rental license" for 3 units prior to your ZBA hearing there is a big chance that they will not approve it for 4-unit. 

    Also if only one neighbor shows up at the hearing that will be against the 4-unit building you will not get the variance. 

    I'd recommend to do your 4th unit in the way that it'll be easy to convert back to 3-unit in the event if you're not getting the variance. 

    Otherwise beautiful building and project. Hope will have some of that gorgeous brick exposed. 

Join the conversationCreate a free account to reply, vote on answers and follow this thread.