How do you finance low income undervalued Apartment building?

Question

I am looking into buying a 37 unit apartment building. I am buying it from a wholesaler and it is priced low because property is in distress. It is 75% occupied right now and the sale price comes to almost $12k per unit. I reached out to so many lenders and some say they don't finance it in that state and some say they don't finance apartments costs less than $50K per unit in sale price. Property is in a C class neighborhood. I did some research and found that it is Not in a "War Zone". Just low income area. It needs about 60K in repairs. My plan was to buy it with hard money with 10% down and use my own funds to rehab and rent out rest of the unit, stabilize it and then do a cash out refi in to a conventional apartment loan. Although I owned/rehabbed SF properties  this will be my first apartment deal (if I can get it done) and I am kind of hesitant to raise money from private investors because they always ask how many apartment deals have you done in the past. Where do I go from here? Should I just drop this deal and move on to the next deal? Only reason I haven't given up on this deal and asking for help from seasoned investors on BP is because I see great potential in this property. Thanks in advance for any inputs.

Sachin Bhat · Answer

@Anton Mattli that’s a great advise. Thank you! I will call the property management again and find out the eviction rate. It’s for sure not in a “war zone” because I called the local police department and asked about that neighborhood. They said they get calls for petty theft and as a owner you can prevent that by managing the property right. Possibly putting some security cameras etc. I have the actual rent roll and currently 19 units are rented and brings $9700. When i spoke with the property manager she said it needs new boiler and new wirings. Roof also needs some attention. But it’s a solid building.

Sachin Bhat · Answer

@Tyler Watts Thanks

Sachin Bhat · Answer

@Nghi Le Thanks for the post. Yes most banks require minimum 20%. If I find a partner who is willing to put other half then it would be 10% down per person. Just trying to be creative over here. Haha

Sachin Bhat · Answer

@Brian Ploszay Thank you for that input. I have the rent roll and currently 19 units are rented and brings in $9700 per month. They said they rented 6 more units since but I don’t have that in the rent roll.

Anton Mattli · Answer

Aside from a hard money loan, I would try community banks and credit unions that are local to the property. You will not get even close to a 90% leverage with them, though, but I also doubt that a hard money lender is willing to go in at 90% of the purchase price unless an appraisal supports an in-place value that would get you to 70-75% LTV. Even if you were able to get a hard money loan with that leverage, I would talk to a perm lender (again, for that loan size, local community banks/credit unions are your best choice) to get a sense of what they would be willing to lend once the property is stabilized.

At $14k/unit after rehab, this has to be in the middle of nowhere or is indeed in a "war zone".  I would validate your rent assumptions with true comps (not just advertised rents) and find out what the bad debt and eviction rate is at those comps.

Tyler Watts · Answer

@Sachin Bhat sent you a DM

Nghi Le · Answer

What state is it in?

I doubt a lender will do 10% down on a commercial asset.  If it was 1-4 units, then getting 90% LTC would be much simpler.  You can expect 20-30% down for something like this.

Brian Ploszay · Answer

In my City, there is definitely lending for that type of asset.  Perhaps you do hard money, then refinance it once the building is repaired and stabilized.  One pertinent question you should ask:  Of the 75% that are occupied, who is paying?  Get a rent roll and ledger.