24 unit multifamily rehab - Construction loan / materials

9 Replies

I've just recently tied up a 24 unit building. The plan is purchase the property with a construction loan including rehab costs. Rehab 2 units a month and move existing tenants into newly remodeled units, rinse, wash, repeat and stabilize the building in a year and refinance after increasing annualized NOI. - Not having done this before, can you see any issues with this plan?

I've started my due diligence and getting bids from general contractors to rehab units.  I'm curious if anyone has purchased materials in bulk at volume discounts for their contractors and stored them on site or at a warehouse until needed?  If so, what sort of discount less than retail can be had with a 24 unit?  What sort of deals be made with the big box guys?

Rehab Items:

Millwork and Doors

Counters (laminate)

Appliances (dishwasher, range, microwave, and fridge)


Flooring (both vinyl, laminate wood, carpet)

Thank you in advance for your feedback

Can't speak to what sort of discounts you might get, but seems like you could just speak with the Home Depot "Pro Desk" and other stores and get this information.

I would caution you that lenders for properties like this will base the value largely on income.  They will want to see stabilized numbers for your building in order to make a loan.  So, when you get the rehab completed and the property leased up (you'll rarely be at 100% occupancy with 24 units, so "full" doesn't really apply) is the point where you start the clock.  Discuss with potential lenders how long they will want the building operating before they will give you the new loan.  When a group I'm in  refi'ed a mini-storage a couple of years ago, the lender looked at five years history.  Weak years right after we bought it, at the start of that five year period, hurt the value and we had to do a cash-in refi.  I don't think the period will be as long for apartments, but it may well be a couple of years after its stabilized.  If there's any way possible, I'd get the units fixed up and rented ASAP rather than taking a year to do it.  The right contractor should be able to do it much more quickly than a year.

Is there a reason that you need to rehab 2/month?  I am assuming that you have a goal to get a certain amount of money from rents.  To do this, you will need to do some updates. 

I would start with the vacants and test the rental market to see how high you can go with the remodeled units.  I would then start raising rents on the lowest payers that are at the end of their lease terms.  Some may choose to stay and pay the higher rent (which is great).  They may not want to relocate.  If you force them, they may move elsewhere.

Over the years, I have found that I buy less from the big box stores and more from other vendors.  Sometimes it is due to pricing but usually it is because of the quality of the product.

I no longer use laminate countertops from the box stores.  I have found cabinet shops that will make the sizes that I need for just a little more money.  This saves the effort of making the difficult cuts.  Better yet, I mostly use granite.  I found a place that sells prefabbed granite for pretty cheap and an installer that works for $250-350 for kitchen and bath.  It costs me about $700 to install granite.

Laminate wood floors do not work for most rentals.  They cannot take a wet mop and it is difficult to pass that information along.  I pay a little more and use the interlocking vinyl that looks like wood.  We install it ourselves as all in requires is a knife to cut.  I buy from discount flooring companies and get a better deal than the big box stores.

I get all my appliances from Lowes.  They are the least expensive and easiest to use in my location.

I get my paint from Dunn Edwards and doors from Home Depot.

Good points on speeding up the turns.  I suppose it's a cost/benefit analysis. Reason I'm leaning towards 2/month is to help with cash flow.  I understand the construction loan options with my lender are 12-18 month interest only options.  Sounds as if the lender also wants the refi afterwards and if we perform to plan, they will refi afterwards.  I will have to confirm how long of a period they will want to see stabilization.  Construction loan will help cash flow, but figure my cash flow breakeven to be around 3 units vacant (depending on what expenses I use in the plan) while rehabbing, reducing operating costs, and raising rents.  Faster is certainly nicer, but would have to plan more reserves to cash flow during construction if we go that route.

@SteveOlafson are your total cost to purchase and install prefabbed granite $700 for both bath vanity and kitchen?  Roughly, what does that translate into $/linear ft?  Are you buying 2cm thickness?  If we can go with granite for only slightly more, that will be an easy decision.

Thank you both for your feedback.

Updated almost 4 years ago

@Steve Olafson

@Bryan Koster  

A relationship with a local bank will be huge for this deal. I've done exactly what you are proposing to do and it worked out well (it came with all kinds of fun challenges though). Go for the 18 month I/O loan if you can get it especially since this is your first deal. A solid borrower with a good bank relationship can get an acquisition & construction loan for the rehab. Some banks will even lend based on the after repair value of the complex (on my project they did). They went to 80% on the acquisition loan & 75% on the construction loan. More recently I've even had better terms on my construction loans. But it also took me a long time to build a relationship.

I have my contractor purchase materials as it makes the process much easier on my end.  Plus they tend to warranty items that they purchase only (especially plumbers).  Storage, purchasing, broken/stolen items can all add up to a large headache (and not worth the savings).  

Are you self managing or do you have a PM in place?  Moving tenants around is very management intensive and comes with it's challenges.  Make sure you plan ahead but also re-evaluate constantly so you can be as efficient as possible when handling the rehab.  More than likely you will drop occupancy upon take over so plan on having your contractor ready to rehab at least 4 units asap.  Also if you are doing plumbing work you might have to plan for 1st/2nd/3rd story etc openings.  I.e. if you have to replace stacks then you need the whole run of units going from 1st floor to your top story vacant.  Plan on signing new leases for the solid tenants (you can re-qualify if lease is up) & terminating or evicting the bad tenants.  Try to identify the bad tenants and coordinate rehabs around their lease expiration dates.  Or if they are non-paying or causing a problem that you can evict for then move forward asap.  Your occupancy will be lower than you are planning.  Use that to your advantage with the rehab.  Also depending on the shape of the units you might have an issue with the city.  Have you called the city to confirm if they have any outstanding violations on the building?  My building was occupied but also condemned (that was a challenge).  Develop a relationship with the inspector sooner than later.  Good luck! 

I'd be cautious about buying materials in bulk.   Sure, you may get some good discounts, but you'll have to pay for interest, storage costs, insurance, etc., and you have risk of theft, fire, etc.

I'd rather approach a local vendor(s) w/ your contemplated purchase volumes, and negotiate volume-based rebates to get similar  net pricing w/o the downsides of buying up front.

Good points on the material purchases guys.  @Chris S. I suppose if I were to pay for materials up front anyway, why wouldn't they take payment and have materials when the contractor is ready..?

@Chris Winterhalter

We will have a PM.  And I'm asking questions to see if the PM may be a good option to act as the GC for the project.  After all, there is a lot of coordinating that will be going on between tenants, PM, and contractors, so this would be helpful with commutations between all.

I've been talking with the city and their is a violation that I'm aware of which is part of my due diligence and possibly could change the dynamics of the deal.  Just waiting to see what the consequences are.

The longer the I/O term the better I suppose. Smart to plan for the surprises and if we finish early then so be it. Can you tell me about your permanent financing afterwards? Or did you just have one loan that had an I/O period then converted to more traditional term and am? We'd really like to refi with permanent financing using after rehab NOI values to get cash out at 75% or so. Also wondering how much of a stabilization period lenders are going to want to see... After all, if we rehab 3-4 right out of the gate and project takes 12 months, then those 3-4 will have 11 months of history, and so one after that. Any advice from your experience will be helpful here.

@Bryan Koster  

There's no real rhyme or reason to seasoning with local banks.  Each bank has different standards (that can change borrower to borrower) and their standards have been changing rapidly over the past 3-5 years.  Some are 90 days, 180 days, a year, or two years.  Many loosen seasoning requirements on turn around deals with an extensive rehab (to say 3-6 months w/ new leases).  That's 3-6 months from stabilization.  

I've seen local banks structure an acquisition and construction loan several different ways especially when you are talking about a small amount of construction (less than 10k per door).  When you talk about cash out what do you mean?  How much forced equity do you think you are going to create?  If your goal is to be in the property with 10% or less cash/equity then you will more than likely need to season the deal 12 months+.  Most banks will have regulations on refinancing you out beyond 90% of LTC in under 12 months.  You have a few options in my opinion:  

Option 1:  You could purchase the property with cash or a private lender if you can get a decent rate.  You might be able to push the purchase price down with a cash offer and can bypass paying for certain closing items twice.  However it needs to be a 24 month private loan (or cash).  If you hit everything just right you might be able to pull off paying off your investor/cash & putting some cash in your pocket when refinancing with a term loan.  However this is very difficult to do especially in 2015.  Make sure you have extra cash on hand to deal with a low appraisal if you go the cash/private lender route.  And if you are dealing with a high interest rate that can kill your deal.  

Option 2:  Purchase the property with an acquisition and construction loan I/O that turns into a term loan after 12-18 months.  Make sure they will lend on the after repair value (based on the appraiser).  Put together a clear concise executive summary/pro-forma for the bank and appraiser.  Leverage will vary greatly by lender and borrower.  But let's say you can get 75% LTC (not to exceed 75% LTV of the after repair value) on the acquisition & construction.  Then you have one loan and one closing for 5 years +/-.  You may have to sign some docs with the bank once the term loan comes into play however that is generally minor.  

Option 3: Get an acquisition & construction loan I/O from a local bank. Lower the term to lower the interest rate. Rehab the property then look for permanent financing. If you try to refinance with the same institution I doubt they give you cash out within a 12 month period (after stabilization). They won't want to be exposed with a new borrower with no cash in the deal. You might be able to go to a different bank for the term loan and bypass certain items but it just depends on the bank.

It really depends on what you want to accomplish and your risk level.  I'm not sure where you are getting your funds so it's hard for me to point you in one direction or another.  Option 2 is probably the safest option.  Trying to pull cash out of multifamily deals in under 24 months is a difficult task.  It can be done but it's a difficult task.  

@Chris Winterhalter   

I've been doing some research and without promoting/mentioning a particular organization, if you Google "apartment financing" within the first couple results you get a website with 30 yr fannie mae fixed rate financing.  They have a product called small apartment loan that has a min. loan amount of $750k.  This product may be a good refi fit for our situation.

After talking with these folks, they actually tell me no seasoning is required if stabilized rents are in line with the market, based on after rehab appraisal.  They say to start the process with them when the project is 90% or so complete and that they move very quickly...  Seems too good to be true, but I think it goes without saying that fannie knows how to incent people to make certain purchases and isn't shy about doing so.

@Jon Holdman   @Steve Olafson  

Addressing your points about speeding up the rehab process.  I've been kicking around some scenarios and I like the benefits of doing so.  I'm just wondering about the mechanics of it.  I believe we'll have 4-5, month to month renters that we can have leave.  We can give notice to all tenants that we won't be renewing leases.  Like Chris W mentioned earlier, there will likely be several units open up immediately.  If we can turn a quarter to a third of them at once after close and keep the others for cash flow, that will help reduce carry cost.  Then move tenants around and do 3 to 4 rounds of this, I would think we should be able to complete the process within 2-3 months with a good contractor?? Thoughts, issues, other suggestions we should consider with a plan like this?

@Bryan Koster  

Fannie's small balance program exists on paper however I don't know anyone that has successfully completed one under 1MM.  Plus fees are generally cost prohibitive with such a small loan amount.  I think this has been discussed a few times on BP so I would search the archives.  I would definitely not count on the program and I'm not sure it will pencil out with the extra costs involved.  Also be very careful of who you deal with from a commercial broker standpoint.  There are many great companies out there however there are many companies that are not credible and profit from upfront fees.  Find a local or regional broker who understands your market (and capital markets).  Fannie/Freddie multi-family loans have a lot of guidelines that don't fit into every property type (no matter the loan size).  

I actually just read this article yesterday about Freddie expanding their small balance program...however you should note the average loan size is 2MM.  


I definitely don't want to be discouraging, if you can figure out a way to make the program work at under 1MM I would love to hear your experience. 

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