Investor / Landlord · Columbus, OH · Member since 2015 · 276 posts · 174 votes
I'm being asked to invest in a 50 year old, 200 unit Chicago high rise building. I'm very experienced with rentals in general and rental complexes with many units and have a good understanding of investment numbers in general but I have zero experience with high rise, elevator buildings. All of my involvement has been with low-rise flats and townhouses.
The building (from what I can initially tell) has been well maintained. There are 10 units per floor with 12,000 sf of living space per floor plus hallways, chutes, etc. The lobby, offices, and some maintenance areas are on the ground level and there are 3 underground levels of parking, maintenance areas, and mechanicals. The building also has a large generator and outdoor pool.
I'm generally comfortable with the numbers but I'm next to clueless about what would be considered adequate reserves for capital expenditures.
If someone has some insights, I'd love to hear them. Thanks for your assistance.
Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
10y
As a Fannie Mae and FHA Multifamily underwriter, your replacement reserve should be based on the overall economic remaining life of the building. In other words, if the property has a remaining life of say 40 years, in theory you would replace most of the replaceable building components over that time frame. Using this formula and your 200 unit project, it would be safe to assume that at least 40% or more of the building components would be replaced. So---40%/40 years equal 1.0% annually of the new replacement cost. New replacement building cost is probably well north of $300/sqft. or $3.0/sqft. At a minimum your replacement cost would be around $3600 per unit.
Obviously, this would be cost prohibitive for most investments and so generally you see budgets that show capital accounts with large infusions staged over extended times. Additionally, most investment are not intended to be held that long and each subsequent owner recapitalize the asset/property extending the economic life of the building.
Quick word on replacement reserve - replacement reserve is for major systems, not normal wear and tear maintenance. Replacement reserve typically breakdown into three groups, mechanical (electrical, plumbing, hvac), structural (stairs, elevators, roofs, windows), foundation ( parking, grounds, sewers).
Unit replacements such as carpets, counters, appliances, paint etc..while capital expenditures, are separate from the calculations above.
All said - Most lenders prefer replacement reserve greater than $500 and usually rely on an physical needs assessment to determine cost over a 5,10, or 15 year period. FHA and loans over 20 years usually require substantially more.
Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes
10y
I am looking at 2 buildings right now with elevators and current landlord has maintenance contracts in place covering the elevators for a set amount per year and then what I'm assuming would be discounts on service and parts above and beyond routine maintenance. I haven't looked into it much beyond that at the moment but will once or if due diligence begins. My guess is you want to have a relationship in place for the ongoing maintenance of the elevator systems and not have to call an elevator repair company that will have you over a barrel when you call out of the blue with a breakdown.
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
A good ballpark to start with would be $250 - $350 per unit or 2-3% of gross rents. If you have some concerns, you could obtain a property condition report but they cost a few thousand dollars. The report would provide detail on the current state of the building and remaining life of all capital items along with costs to replace/repair.
Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
10y
As a Fannie Mae and FHA Multifamily underwriter, your replacement reserve should be based on the overall economic remaining life of the building. In other words, if the property has a remaining life of say 40 years, in theory you would replace most of the replaceable building components over that time frame. Using this formula and your 200 unit project, it would be safe to assume that at least 40% or more of the building components would be replaced. So---40%/40 years equal 1.0% annually of the new replacement cost. New replacement building cost is probably well north of $300/sqft. or $3.0/sqft. At a minimum your replacement cost would be around $3600 per unit.
Obviously, this would be cost prohibitive for most investments and so generally you see budgets that show capital accounts with large infusions staged over extended times. Additionally, most investment are not intended to be held that long and each subsequent owner recapitalize the asset/property extending the economic life of the building.
Quick word on replacement reserve - replacement reserve is for major systems, not normal wear and tear maintenance. Replacement reserve typically breakdown into three groups, mechanical (electrical, plumbing, hvac), structural (stairs, elevators, roofs, windows), foundation ( parking, grounds, sewers).
Unit replacements such as carpets, counters, appliances, paint etc..while capital expenditures, are separate from the calculations above.
All said - Most lenders prefer replacement reserve greater than $500 and usually rely on an physical needs assessment to determine cost over a 5,10, or 15 year period. FHA and loans over 20 years usually require substantially more.
Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
10y
what I was trying to say is that, most times when investors acquire a property, they usually invest addition monies to repair and improve the property. Most investors see a curtailing of returns/yields around the 7 year mark as repairs start to increase. The usual choice is to sell or refi and reinvest in improvements.
Nicolas, you wrote: "New replacement building cost is probably well north of $300/sqft. or $3.0/sqft." It appears the second number is a typo and I can't quite guess what you intended.
Lender · Dallas, TX · Member since 2015 · 283 posts · 128 votes
10y
Sorry I was thinking faster than I can type. So here a second attempt.
If the new building replacement cost is $300/sqft then 1% is $3.00/sqft. You stated that there is 12,000/sqft per floor and 10 units per floor so that the average unit is 1,200/sqft.
At $3.00/sqft times 1,200/sqft per unit, the annual replacement cost reserve would be $3,600 per unit.
Real Estate Agent · Atlanta, GA · Member since 2014 · 135 posts · 40 votes
10y
Ed W. Hi Ed. I'm a broker in Illinois and I saw this old post and wonder would you be interested in a 200+ unit complex more the style of homes that your used to. Tri-level duplex's and single family homes. Net revenue of 1.9 million a year for only 9.4 million. If this if this is something that might interest you send me a colleague request with contact information.