I'm working through a 18 unit multifamily Kansas City negotiation and would like some help thinking through deal structure, if it even makes sense.
It's a classic mom and pop mismanaged property situated in a good area but needs a lot of work.
What I know:
- 12 - 1 bedrooms
- 6 - studios
- Has a mortgage of $248k left at 11% interest rate
- Current Rent Roll. Majority are below market
- $7,355 in expected rents
- 3 studios vacant ($500 ea)
- 1 studio free rent for manager
- 2 units not current ($900 total)
Monthly Expenses (from 2017 taxes)
- Mortgage: $2699.58
- Taxes: $532.39
- Insurance: $530.28
- Repairs: $1,157.67
- Electric: $165.43
- Trash: $178.81
- Water: $850
- Gas: $41.07
- Management: $700
- Cable & Internet: $176.05
- Total: $7,031.28
- Net: -$626.28
- Pre-rehab rent raises could get monthly income to $8,500
- Opportunities to drastically reduce expenses. He admittedly said water has been an ongoing headache
- Needs complete rehab, I've seen his bids and he's quoted $500k to get everything in tip top shape.
- Post rents would be in the $14,000 range
He's been talking to an agent who created a post rehab pro-forma valuing the property north of 1 million dollars so he's stuck at this valuation for now. His accounting is almost non-existent which I believe has been prevented him from refinancing or selling. He's fallen out of escrow a couple times due to lender concerns. I have a really good relationship with him at this point and he's open to any ideas of a structured deal (partnership, seller financing, etc).
Any creative ideas on how I can make this work?
Obviously I'd love to strike a deal with him but I'd also like to help him create a game plan, even if I'm not in the picture.
@Derek Mountain If we're talking creative, a master lease is an option. Your window to close could be 3-4 years from now once you've brought the property up to standard. If he's willing to do a sizable vendor take back mortgage you could float the master lease option.
That's an interesting approach, I'd never heard about that before. He initially liked the idea of being involved on this new project but maybe I can bring this option to the table and let him step away from his headaches.
I don’t mean to rain on your parade but I’m in Kc & I don’t know where you could get 700-800/month out of that small a unit. If you did accomplish that your hoping to bring in 14k/month with estimated 12,600 expenses with 500k rehab. I don’t see how this would be any kind of a deal with 1400/month potential profit. the thing I see your scenerio is missing is accounting for non pay & vacancy. You can assume at minimum each unit will be vacant or non pay one month per year. Yearly profit @ 16,800 - 14k = 2800/year best case. In Kc I don’t see a valuation of 55k/unit on that small of units either. My opinion your smart option is to run. If your looking for investments you could do a lot better with 750k.