Fort Worth, TX · Member since 2015 · 80 posts · 16 votes
Let's say you're going to buy an apartment building. It doesn't really matter what size, but just for this example, let's say it's a twenty unit building. The building is fully occupied, and the tenets are all paying their rent. While you're doing your due diligence, however, you discover significant deferred maintenance issues, which necessitate some rehabbing on the building and the units. How do you go about getting the rehab done when the units are all occupied? I don't believe you're allowed to simply boot everyone out the door so you can spruce the place up, but you can't do the rehab with them in there. Assuming you can't finance the rehab out of your own pocket and do it gradually as each unit's lease expires, how can you do it?
Not having the capital to address deferred maintenance or trying to use the property's cash flow to fund rehab is risky and one of the reason that investors lost properties to repossession during the last downturn. It's best to have a source of liquidity at inception, or raise the capital up front to fund the rehab or have a construction/perm (mini/perm) loan to fund the rehab. With the construction/perm loan, you provide proper notice to the residents before their leases expire (or right away with the MTMs), rehab, roll the rehab costs into the loan and the loan converts to permanent amortizing financing after the construction period...6-12 months. Matching your debt structure with your strategy is important. Otherwise, if you have a hiccup in cash flow for whatever reason (downturn, roof replacement, a few lease breaks, couple of HVAC units crap out, etc.) you can't maintain the property and end up in a downward spiral.
You do exactly that, you give them notice to vacate to do renovations/repairs.
This however is rarely done as most new owners require the rental income to carry the property. You would reno when units become vacant. If the previous owner has deferred so can you.
Also, if the tenants aren't complaining, honestly, why bother until they move? If they are Section 8, however, you may have to do repairs in place. You could also wait for one vacancy, and then shift tenants around.
Let's say you're going to buy an apartment building. It doesn't really matter what size, but just for this example, let's say it's a twenty unit building. The building is fully occupied, and the tenets are all paying their rent. While you're doing your due diligence, however, you discover significant deferred maintenance issues, which necessitate some rehabbing on the building and the units. How do you go about getting the rehab done when the units are all occupied? I don't believe you're allowed to simply boot everyone out the door so you can spruce the place up, but you can't do the rehab with them in there. Assuming you can't finance the rehab out of your own pocket and do it gradually as each unit's lease expires, how can you do it?
My idea was to purchase a value-add opportunity with 70% occupancy or less. In an example with 20 units, 6 would be unoccupied and you could rehab those units first. Move some of the current tenants into the rehabbed units, then fix those units up. Wait for regular turnover on the rest of the units.
Not having the capital to address deferred maintenance or trying to use the property's cash flow to fund rehab is risky and one of the reason that investors lost properties to repossession during the last downturn. It's best to have a source of liquidity at inception, or raise the capital up front to fund the rehab or have a construction/perm (mini/perm) loan to fund the rehab. With the construction/perm loan, you provide proper notice to the residents before their leases expire (or right away with the MTMs), rehab, roll the rehab costs into the loan and the loan converts to permanent amortizing financing after the construction period...6-12 months. Matching your debt structure with your strategy is important. Otherwise, if you have a hiccup in cash flow for whatever reason (downturn, roof replacement, a few lease breaks, couple of HVAC units crap out, etc.) you can't maintain the property and end up in a downward spiral.
Average length of tenancy for multi-family is three years (I read that somewhere), but the tenants at our multi-family tend to stay in place longer. One is even at 28 years! We don't hesitate to renovate with tenants in place. For one of our tenants who has lived in the same apartment for 24 years we did a complete renovation in one week. We moved them to a hotel for the week and had our team descend upon the apartment. Happy tenant, happy landlord.
In your hypothetical scenario, you didn't say what the significant deferred maintenance issues are. Most things from furnace replacement to roof replacement can be done fairly quickly without the tenant needing to vacate. Even painting a room or replacing floor covering can be done without too much inconvenience. Sometimes when we do an upgrade on a unit, we wait until the tenant is planning to be out of town for vacation or willing to stay with family/friends for a few days. We make arrangements with tenant and do it then.
I'd much rather keep a good tenant in place, than give them the boot just because I need to do some repairs or want to make some improvements.
All good thoughts, but my primary concern was in terms of financing. With SFRs, you'd use hard money, buy, rehab, and then rent. With multifamily, if you're financing, you can't wait a year or however long it takes for leases to expire. You've got to get in, get it financed and rehabbed, and be done. Unless I'm having a fundamental misunderstanding of how financing works on larger multifamily properties...?
Most of my reply keeps getting cut off...even the one below chopped half my content...can't get it to work. Most leases are less than twelve months and you take care of the rehab during that first twelve month time period, earlier the better.
All good thoughts, but my primary concern was in terms of financing. With SFRs, you'd use hard money, buy, rehab, and then rent. With multifamily, if you're financing, you can't wait a year or however long it takes for leases to expire. You've got to get in, get it financed and rehabbed, and be done. Unless I'm having a fundamental misunderstanding of how financing works on larger multifamily properties...?
Yes you can, there are loans designed specifically for rehab and re-positioning properties...called construction/perm or mini/perm. Also, the Fannie Mae apartment products allows the rolling of rehab into the loan at certain levels of rehab (<$10-15k per unit) and for stable properties. Most of these products are designed to have the rehab take place within the first twelve months of ownership (and preferably sooner, which is best for both the lender and the owner). Most leases do not extend beyond 12 months and many of these mismanged properties have residents on month-to-month leases. For properties that need a little more re-positioning (<90% occupancy), investors will get a bridge loan from a lender/bank (usually shorter term financing) and then re-finance into permanent financing with Fannie or Freddie after the property is stabilized with rents raised. All of these lending products and the related strategy on apartments is very common. BRRRR with apartments is largely the same as BRRRR with SFR, just on a larger scale. I am BRRRR'ing an apartment right now (and incidentally, it's much easier than my last individual flip of an SFR). My rehab of a unit only takes a week and it is managed by the property manager rather than my SFR flip which was managed by me and took months.