What are the potential pitfalls with 6+ family rehabs?

7 Replies

I've found a potential deal, but I don't know what I don't know when it comes to investing in 6+ unit buildings.

Found a bank owned 6 family in a rural C+ area in New Hampshire. Property is boarded up, and needs massive rehab. Electrical and roof are newer, which is a nice plus. The bank recently dropped the price by 50%, to $50k.

Assuming a rehab of $20k/unit, the rents in the area would make this a cash cow, as the units could each fetch $750 with ease. My concern is, I'm afraid there's a hidden surprise that would only be uncovered by performing an expensive environmental cert.

My questions are twofold -
#1 - what are the worst possible pitfalls that are typically missed by the naked eye?

#2 - is there a way to tell, through public records, if there's something buried underground that would cause a problem?

Thanks for your input.

#1 is research the tenant population  and Vacancies. See if you are comfortable with them and if the rental market is strong

#2 your 20K per unit is reasonable for that rental price point.

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Pitfall:  6 family tips you over to commercial..

#1 ZONING and USAGE: before you buy make sure that it can stay a 6 unit.  Sometimes it's non-conforming, so you have to double check with the county.

#2 CODES: Make sure you know if anything needs to be brought up to code. water meters, electrical, safety, egress, sprinkler systems. 

ex. I was told for my 6 units everything will be grandfathered in. "Heck the owner owned it for 30 yrs" said agent and seller. HOWEVER, what they didn't' know, was the township looked at seller as SLUMLORD, so he told me point blank, the bldg is not in compliance!  I talked to county to say I understand but he needs to work with me to give me time to bring everything up to code. He also worked with me on the list of things that needs to be done.

#3 EFFICIENCIES: One of the other thing is I realize, the POST OFFICE, ELECTRICAL and WATER COMPANIES wasn't happy with my bldg. so we have to move the mailboxes to a safer location. Upgrade all the electrical and install new wireless water meters.

The sprinkler system was there , but it wasn't active, and seller never paid the extra water fee for the sprinkler (hidden cost 175/quarter)  BUT I know these ahead of time, and I calculated that in CAM cost.  AND he never installed the Security to hook up to the sprinklers.

#4 LEASES: it sounds like yours is vacant, but if it had tenants make sure you verify the lease and term.

#5 CAM: Common Area Maintenance, this was the new thing I had to deal with.  You need to calculate the utilities to light and heat the hallway, landscaping, snow removal if you have sidewalks and parking lots.  

I am closing on similar 3 unit next week, and finding same story. It was in process of being converted into a 5 unit (5200 sqft) when the last flipper declared bankruptcy.  City says it must be fully up to code first (20k sprinkler, unknown++). So, we could keep it a 3 unit, or most likely make it a 4 unit. We have to decide cost of upgrade vs unit.

Aside from what @Jennifer Lee and @Raymond McGill mentioned, this will require commercial financing, and understand that commercial financing is a different animal.  

1.  Your loan is going to be too small to interest most banks that do commercial lending.  Even those who lend up in that area.  

2.  Commercial appraisals are not $400, they are $500-$2500 (or thereabouts for a project of this size)

3.  They may require a phase 1 environmental

4.  Origination points are paid at the time of application, frequently.  Not at close.

In the rural areas of NH, the issue is the tenant base and lack of jobs.  So screening is paramount, and even then, you will run into issues.  Depends on where it is.

@Ann Bellamy  I second her post!! if its commercial everything is more expensive. a 250 inspection becomes a 2000+ inspection and all day event.  And ditto on lending you need to find the right broker to fund these smaller deals

@Ann Bellamy and @Jennifer Lee are right. One extra tidbit.... that place is not local to you. A long distance rehab is a much harder deal to survive. I am guessing your deal location, but my guess is its two hours each way. That makes this much harder. I am selling my last SFH rental in rural C- area now. The 1 hour each way meant I never went there. My new deal is 30 minutes, which is better. Future properties will get closer and closer to my house as I shift from cash flow to appreciation.

Thanks to all for your input. I'm well aware that the guidelines/costs for financing 5+ units is a different ball game. The issue of this being a long distance away is a very good point I hadn't considered. For someone getting back into the investing game, managing the logistics of a log distance rehab would probably be a bad idea.

Camera inspect ALL sewer lines before close unless you've budgeted to just replace them.

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