Hello BP. Looking for some advice and contacts.
I have a lead on a 46 unit building. The story is that it has been underperforming for a while. Its two 23 unit buildings. A fire recently damaged the top floor of one of the buildings. As it stands, inspectors are saying its a complete gut on the 3rd floor(8 units) and needs a completely brand new roof including the trusses.
Financially the project could likely work if the total renovation costs stayed near $800k to rebuild 8 units, a new roof, and repair damage to some of the lower units. However, there is risk and $800k may not cover all the unknowns that will pop up as the renovations continue.
To combat that I am thinking a solution would be to just rip off the top floor of the building and put the roof over the second floor. Given the units would only rent for $530 a month at most, paying $100 a foot for rehab and rebuilding doesn't make much sense to me. However, if I could spend $300k or less for a new roof over the second floor and repair lower units(flooring, painting, and potentially some drywall) then this project becomes a lot lest risky and still shows a similar financial upside.
The plan is that to buy the property with a valuation for 23 units that are functional and renting. Then spend construction costs to rip the 3rd floor off, clean up any issues and get 15 units back online for the cost of the construction.
I have to make an offer within the week so need some advice. If anyone has experience with something like this, knows contractors in the area, or other advice that may be helpful please reach out.
@Joel Florek Have you spoken with any structural engineers or contractors for either option on viability and cost?
That would probably be the next step in my opinion. I can't imagine that this would be worth it regardless at that rent level and construction cost. Are you planning on using all cash or hard money for this? I would think a bank would be extremely, extremely weary of this especially since this is a new market for you.
@Zach Quick I appreciate the concerns. Obviously there would need to be a lot of due diligence before I could close on something like this. Reaching out to a structural engineer is a good suggestion and I will do that later today.
I have already spoken with some contractors and that is where the suggestion came as rebuilding can run into a lot of issues on fire properties. Looking to see if people have contacts in that area or from people who have done a similar sized project.
I have done something similar but the building was demolished laterally and salvageable units remained on what was the left side of the original building for all 4 of the existing floors. The overall footprint of this building in the complex was decreased by 2/3 in this instance. I think it is a great idea that you came up with so long as the cash flow is there with the reduction in units. On a deal of that scale, the safe play is the way to go. If you have the opportunity to still cash flow but can cut your potential liabilities by a half million dollars, then it is a no brainer. If the deal only makes sense factoring in the additional 8 units and you are dicey on the overall budget on the job and don't have a way of mitigating an overage on your construction costs, I'd say walk as much as nobody wants to hear that.
I wonder if a rehab of the third floor can be done with the second floor residents remaining in their units. They would have to vacate for a few months to demo the third and reroof on top of the second. Would you pay to put them up someplace else? Would you end up losing some second-floor tenants because they are unwilling or can't afford to temporarily live elsewhere? It could end up being a wash or even cost more to demo the third floor once you factor in indirect costs.
@Brian Rossiter If I were to pursue I would want to see all tenants be out of that building as a stipulation in the contract prior to closing to make sure I have no delays from people living in the building.
However, due to another offer on the property I am thinking this one will be best to pass on. The seller is moving quick and I wouldn't be able to have quotes in on everything in time to make an offer so would have to make some assumptions and that's a good way to get burnt badly.
I have an interesting deal that just came up on an 84 unit property that has 30 units gutted. 54 Units are being rented so there is still cash coming in. The units needing renovation are all on the first floor in each of the two buildings. All plumbing, windows, and electrical is completed. Needs insulation, drywall, kitchen, baths, flooring, paint and finishing. Am in the process of getting more information on this property and am excited to see what comes out of it. Given the sellers situation I forsee having some time to work through this in more detail.
@Joel Florek Are you doing any special marketing or just calling brokers/owners for these potentials? Always curious how people farm multifamily.
@Zach Quick I use LoopNet, Trulia, Craigslist(don't usually find anything big), and then call listing agents and ask if there is anything else in the pipeline for new deals.
i'm familiar with the 84 unit your talking about. The rehab will be way more than $5,000/ unit. You could have issues with ADA compliance etc, etc. If your interested in pursuing that property, I'd be happy to provide you any insights that I have. I'm looking in Columbus also but I'm looking at larger properties.
@Mark Kuster Ill PM you to get the conversation going. The marketing flyer that is on LoopNet for that 84 unit is extremely unreasonable as you mention. Until I get records from the owner of the property and get through more due diligence on issues like you mentioned I have budgeted $300k per building for renovations for a total of $600k to test the waters of what the financial performance might look like down the road. Haven't been in the building yet but there are some interesting circumstances with the owner that could make it an interesting deal if the price were to be lowered to the right level. While I have a general idea of where that level is I cant confirm until I have more concrete financial data.