32 Unit Apt Complex, should I wholesale or keep it and rehab?

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32 Unit Apt Complex, should I wholesale or keep it and rehab?

AJ Hernandez
Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes

Hi Everyone,

I am new to the forum. I currently own a 32 Unit apt complex free and clear that I picked up for a steal!

I have had many offers but at this point I am wondering if its better to keep it and rehab myself.  The income per month works out to be $14,000 per month (on the low end). I have bids for the rehab at $325,000.  I have a local Realtor in place to manage the property and the project if needed.  I can either make a quick $100,000 upfront for wholesaling it or make $170,000 per year. The issue is I have never owned a multi unit of this magnitude and don't know where to start. I am not sure even where to get the money to do the rehab. I would consider taking  a partner and going 50/50 but again I wouldn't know where to find someone.  I just don't want to sell myself short.  Owning the property would be ideal for me and my family's future. Please help!

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Account Closed
Frederick, MD · Member since 2015 · 654 posts · 256 votes
10y

Although far from my area of expertise - once the property has been rehabbed, I presume the taxes will increase significantly from its current $2,600/year?

As previously mentioned, should you proceed with the rehab, make sure it's with a contractor who is seasoned with this scale and type of work, and with the resources to perform it.  Regarding those bids of $325K for the rehab, were they provided from the cuff, or in response to a formal narrative Request for Proposal (RFP) outlining the project expectations and requirements?  Additionally, did their bids include the architectural, engineering, and other professional fees, along with all of the permitting fees required?  These can add up to a pretty penny.

Finally, if you decide to move forward on your own, I strongly encourage you to have a construction consultant on your side of the table to represent and assist you with the A&E and GC selection process and through construction.  Relationships go a long way in moving things along, so one who is local and well regarded will be worth their weight in gold.

Good luck with whichever way you choose to go!

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    I would start by talking with a few local lenders and seeing whether you could get the funds to perform the rehab.

    The bank or a commercial broker can help you build a pro forma for financing and income after the rehab so you can decide whether to hold it or sell it.

    0Reply
  • Shane H.
    Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
    10y

    @AJ Hernandez Congrats on the purchase.

    Sounds like you have a tough decision.  What strategy did you use to pick up this property?  Foreclosure, mailing letters, networking, estate.....?

    Do you have any residential or multi family experience?

    0Reply
  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    Hi Shane,

    Thank you. I actually bought this property from the bank as a foreclosure. I bought it for less than the cost of a trip to Disney! I do have some duplexes and single family but this building is something I have never dealt with. Its got great potential. Its actually borders up against a town that is low income and had a bad reputation in the past and I think that is why many people passed on it. However, the legal description of the building is in the next town over, which makes a difference as far as school districts. And the next town over is one of the most affluent towns in the state. So this building has lots of potential. I am thinking I will just start contacting local lenders as someone here suggested. I live out of state so I can't be there but I am doing all that I can to find out about rehab lending on properties like this. In the grand scheme of things  $300,000 isn't that much for a property I own free and clear and with the income potential.

    I hear people talking about private investors but I don't know how to find them. Also, has anyone ever used patchofland??? It seems interesting and maybe like the way to go.

    0Reply
  • Shane H.
    Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
    10y

    @AJ Hernandez   What state/locale is the property located in?  Never know, if you mention the location here you might come across some connections.  Some folks have keyword alerts set up if their state or local city is mentioned.

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  • Ronald PerichPro Member
    Investor · Granite City, IL · Member since 2014 · 658 posts · 301 votes
    10y

    @AJ Hernandez, we could use a bit more information about the specifics of the property if we are to give you a more-informed suggestion.

    Are any of the units vacant? 

    How did you arrive at the $325K for renovations? 

    The income you mentioned, $170K per year, is that after all expenses? What about after the debt service of the rehab loan?

    0Reply
  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    Here are some more specifics on the property.

    32 one bedroom units

    Building is 100% vacant

    Yearly taxes $2600

    Rehab cost from contractors (actual bids) $336,000 includes plumbing, electrical, sprinkler system, cosmetics

    Property is 30 miles outside of Little Rock

    Not quite sure yet what the monthly expenses would be but tenants would pay their own utilities.

    0Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    What do you think the apartments would rent for after rehab? Based on similar buildings nearby.

    0Reply
  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    They will easily rent for $500 on the low end up to $650, perhaps more if we go the Section 8 route.  There is another building very near this one that is 16 unit studios and they are renting for $450 and $500. Plus they don't have central air, just window units.  Some investors from California bought that building for $280,000 in 2012 and did a complete rehab and now has it under new management. The manager said they never have more than 5 units vacant. So I know for sure these units will rent in the range that I mentioned. The bids that I received included putting in central air which will make the units even more desirable. 

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    OK. So here's some back of the envelope math for post-rehab valuation.

    Annual gross income: $192,000 (@ $500 per unit)

    Annual operating expenses: $115,200 (60%... higher than standard 50% as Class D)

    Annual NOI: $76,800

    Stabilized valuation @ 10 cap: $768,000

    Stabilized valuation @ 12 cap: $640,000

    Total cost including purchase, rehab, lease up costs and negative cash flow until stabilization: $400,000

    This gives you an unlevered 50%-100% return, or higher if you can get a bank to fund the improvements.

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    As to how to fund the improvements, work with the commercial loan officers at a couple of local lenders. As long as your math is good and you can put in maybe 25% of the cost of improvements, they should be able to fund the rest.

    If you don't have the downpayment and can't persuade the banks to accept the land and existing building as collateral, you might want to flip the property for a quick $50k or whatever to an investor who will do the work.

    Just thought of a possible red flag... what is the state of title? Do you have a clean warranty deed from the bank or could there be liens on the title?

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  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    Thanks for the numbers.

    How did you come to the Annual Operating Expense numbers?

    The deed is a Special Warranty Deed which is common for commercial properties. We have  Title insurance policy,

    0Reply
  • Shane H.
    Investor · Wichita, KS · Member since 2015 · 769 posts · 279 votes
    10y

    @AJ Hernandez

    You might message/connect with @Justin Cooke  -- Good guy I've met with here locally and is from the Little Rock area and may have some investments there if I recall.  He's in Wichita now but may have some insight or want to partner with you.

    0Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @AJ Hernandez The expense figures are just a guesstimate. Standard operating expenses are usually around 50% of gross revenues, give or take. Yours might be a bit lower because you will have just rehabbed, but a bit higher because it's Class D. I played it on the safe side with a 60% guess.

    0Reply
  • Matthew Murphy
    Investor · Rochester, WA · Member since 2013 · 221 posts · 30 votes
    10y

    Nice purchase! If you go ahead and keep it, start a diary thread of the progress! 

    0Reply
  • Justin Cooke
    Investor · Wichita, KS · Member since 2013 · 27 posts · 2 votes
    10y

    @Shane H.; @AJ Hernandez

    I did live in Arkansas for two years, but Fort Smith area not Little Rock.  I don't know that market.  Good luck!

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @AJ Hernandez  sell it pocket 100 to 150k  lots of work for minimum equity based on the above.

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    1Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @AJ Hernandez

    What am awesome problem to have.  I have said often that owning this type of property is like having a goose that lays golden eggs. If you sell the goose, you'll stop getting eggs.

    Only you can answer if you want to keep the property.   There is work involved, but what a great payoff.  You will have cash flow, tenants paying off the mortgage, depreciation write off, but you will have tenants.  If you continue to utilize management company, then you will be managing the manager and in effect you will be managing the asset.

    Good luck

    Let me know what you decide.  I have a similar dilemma.

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  • Matt K.
    Walnut Creek, CA · Member since 2015 · 3k+ posts · 2k+ votes
    10y

    would it be possible to lower the construction costs by doing them in phases? 

    Instead of doing all the units at once maybe break them into blocks or buildings just to be able to get tenants in? Not sure how the property is set up if this would even be possible or worth the planning/managing/headache. 

    0Reply
  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    I agree its a nice problem to have. My husband is very eager to take on the project but I am more skeptical. I don't want to get in over my head, but on the other hand I have to take a leap at some point. I have been very comfortable with the single family and duplexes I currently own but this is a huge undertaking. I believe it can yield us a healthy cash flow for life.

    I am working on a pro forma as  Nick suggested. Its hard projecting the annual expenses. I know Nick gave me some numbers but I am trying to understand how that is accurate for this building. If the tenants are paying their own water and utilities, then my part would be the sewer and trash. Plus taxes of $2600 per year. I called to try to get insurance quotes but they would not even attempt to give an estimate since it was vacant. I asked if it would be more than $10,000 per year, they said no. So with $2600 in yearly taxes, and lets figure $10,000 annually for insurance, $20,000 for property management (at full occupancy) and trash and sewer, would my my annual expenses still be at 50% of my gross?

    Also, the way the building is set up the one bedrooms would be easy to convert to two bedrooms. I was thinking that it might be good to convert at least 25% of the units to two bedrooms. Just a thought. 

    0Reply
  • JaMarcus Joseph
    Wholesaler/ Buy and Hold Investor · Sherwood, AR · Member since 2015 · 83 posts · 18 votes
    10y

    He bought it on a tax sale for $16,500 according to tax records and refuses to negotiate a reasonable price. The units are 16 efficiency and 16 one bedroom with a laundromat. They're on one water meter and one electric meter. Fire chief says they need to be completely gutted to install new fire sprinkler system. However, the entire city is on board with anyone rehabbing them. They have a problem with slumlords. The new mayor is in a campaign to rehab the city by removing nuisance property. They have a grant approved for the removal of 700 houses. They've already started  taking people to court. The city's gang problem is mostly resolved. A city official told me the story of the raise and fall of the gang leaders. There are talks on the radio of new ordances making it a better place to live. The city needs quality investors looking for long term returns. I believe in the city because the young blood in the offices now believe in their city.

    0Reply
  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    Jamarcus, its very sad that you have come on this forum to show negativity toward me and my husband and our project simply because we did not accept your offer on this building. We considered your offer but as you know it was not a serious offer. Just because we did not accept your offer does not mean we  "refused to negotiate". You are certainly showing your lack of experience in this business and lack of professionalism. Our last two offers were $115,000 and $125,000 which is more than double what you offered. You were not willing to even put a deposit, provide any sort of proof of funds, and even stated in this forum that you did not have the financial means to pay for your real estate license. These were all things we took into serious consideration with your offer. Keep in mind you also gave us a verbal offer and then disappeared for a week and then said you changed your mind. So there was a lot of back forth which made us uncomfortable with working with you. How we left it with you was thanking you for your offer and wishing you the best on any future endeavors. So its very unbecoming of you to lash out so childishly because we did not accept your offer. 

     My husband I came here looking for  help and guidance as we have had many decent offers on the building since yours but are considering doing the rehab ourselves. This is also something we discussed with you when we spoke. In fact, you said you had private investors that could help us if we decided to rehab the building. So I am not sure what you have to gain by coming to BP attempting to discredit a property you so badly wanted. From what I have seen so far, most of the people on the BP community seem to be experienced, professional, honest, helpful and encouraging. Your post was the first post that I have seen that sounds like an angry ex girlfriend.

    I have already given the stats/number on the property. Nothing I have stated was different than what you stated, unless you are trying to help me sell the building....if so, then thank you kindly. 

    The bids I received included updating the sprinkler system, separating the meters, electrical, plumbing and cosmetics. We currently have a great Realtor that  has helped us tremendously with putting the bids together and working with town officials.  As I stated in a previous post, although the town borders a town that has historically been known as a "bad area", this building is in a section of that town that was recently listed as one of the most affluent areas in Arkansas.

    Your post is certainly in poor taste and just goes to show there will always be a few bad apples in the mix.

    My advice to you is, don't be a hater!

    "The challenge of leadership is to be strong, but not rude; be kind, but not weak; be bold, but not a bully; be thoughtful, but not lazy; be humble, but not timid; be proud, but not arrogant; have humor, but without folly.” - Jim Rohn

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  • AJ Hernandez
    OP
    Wholesaler · Little Rock, AR · Member since 2015 · 10 posts · 2 votes
    10y

    Oh and I forgot to mention, we did NOT buy it from a tax sale. But we did buy it for $16,500....sure did! Life is good aint it!

    1Reply
  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    10y

    @AJ Hernandez

    I understand being torn between doing the project yourself and getting in over your head. I agree that you have to take a leap at some point. But if you would prefer to take a half leap, another route you could go is to partner with a contractor who has done this type of rehab before. 

    There are many ways that this partnership could work and anything you agree should be written by an attorney. A typical way would be:

    - You bring the property and 25% of the rehab cost

    - Contractor brings 75% of the rehab cost + experience

    - You both give personal guarantees on the loan

    - You get to make final decisions on important topics

    - Both partners split equity, cash flow and profits 50/50

    This approach takes the rehab pressure off you and also relieves you of a lot of the financial burden. And hopefully your contractor will be able to validate your numbers and your plan. But it does mean you have to find a contractor that you trust and will be partners with for many years.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    @AJ Hernandez  if any of Jamarcus's post is true about the demographics of the area I would SELL SELL SELL do a 1031  buy a MUCH BETTER QUALITY asset.. that is already performing .. the rehab your talking about is HUGE especially if you have never done it.

    you will end up about at the same place you will have a much better quality asset for long run and you will have cash flow now instead of over a years time.. etc etc.

    and for that matter if you have the ability to buy these types of deals for basically 10 cents on the dollar keep doing that put time into doing that then try to rehab and landlord...

    move up to a quality asset with quality tenants. what your describing in this building is low end nothing but problem tenants and you may RUE the day you decided not to just flip it walk away with a fantastic profit pat yourself on  the back etc.

    There is a reason this building is in this condition... anyone buying rentals in these areas must look at WHY is this building like this... answer that question.. 95% of the time its because of tenant demographics ... the other 5% is bad ownership... And you could do all this work to the building and 5 years from now it could be in the same condition it is now.

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  • Jim M.
    Real Estate Investor · Charlotte, NC · Member since 2011 · 252 posts · 56 votes
    10y

    Is it a one building property or multiple?  You could take on one building at a time to get the property cash flowing as quick as possible.  Make sure to pick a contractor who has done this work before cause this will be a big one and you do not want any delays cause the bank loan would be eating your cash.  

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