Just did my first Deal and bought a 4 Plex! Need Advice Stat!

Cindy M. · 2017-11-28T11:21:58-08:00

Hello, This is my First Time posting, so guess I am a real Newbie! Looking to my new Bigger Pockets Pro Friends for Advice and give me an honest evaluation of the way I went about it, so I am putting myself out there for comments on 2 parts... Listened to Branden and Josh podcasts...and said, you know what? I can do it! Thanks!Feels Great to be in the Game! OK... 1. Just Bought a 4 Multifamily Rental Property closed in Sept., about 2 hrs from where I reside, but in another state (CT). This is a long term investment to hold and rent. Managing it myself to get and need the experience. It was all rented, good cash flow after all expenses paid, got a good price (needs TLC but not falling down, hey, its all rented) so I can rehab later (little by little), maybe do brrrr and my goal is to pay it off in about 5-7 years. Since I know the basics in small business, as I have had one for over 20 years, I saw this as a new business...so, I got an LLC for this property. Went to a local savings bank in CT and gave me a Commercial Loan under LLC @ 20% down for 20 years at 4.25%. Purchase: 133K Loan $106K, payment $767 + tax escrow will roll in in Jan., so payment $969. Can refinance will another lender after 1 year but will be a prepayment penalty of 4% then 3% etc., after my 5yr 0%. Which I thought it was OK b/c I should have it all paid off in 5-7yrs, hopefully.Q. Did I choose the right Loan product ? Was commercial the right way to go for my first deal? 2. A tenant is moving out and I think it is a blessing in disguise actually, so all good! Since all units need Rehab, and now tenant is moving out, it makes sense to do the whole unit while it will be vacant. But Wasn't planning on doing Rehab this early (Its a Gut) so need a loan for up to $15-20K, figure I take a little more out...not sure what I am going to find behind those walls...Q. For this Rehab, what loan product should i use and with what co., went back to my bank and they might give me a no interest loan for 6 months etc....but timeline might be tight...I am not sure how should I finance this?Thanks in Advance for Your Help!

Andrew Kerr

Rental Property Investor · Everywhere, USA · Member since 2012 · 689 posts · 525 votes

8y

@Cindy M. Congrats on your first deal! That is a big step that very few get too.

As far as financing, its hard to say if it was good or bad. It really depends on what you look for, and for one person it could be great, and for another, it could be bad. 4.25% is pretty competitive as far as the rate. Most commercial loans seemed to be amortized for 15-20 years, so you are good there. If your hold time is 5-7 years at least, then having a 5 year pre pay isn't that bad. For me personally, I like flexibility, so I would have tried to find a loan with no prepay or maybe a one year pre pay. A good example of this is, I bought three properties last year, they were off market deals and below market value at the time. I bought them with the plan to hold for several years. But the demand for these college rentals has gone crazy, and the value has gone up almost 23% in 12 months from my purchase price, and would make me double my money in a year. Now here I am going from not planning to sell, to strongly considering a sale.

For your second question - I would start with some analysis. What does it rent for now, and what would it rent for when fully renovated. I would also look at what it would cost to do minor repairs to get you another 3-5 years, and compare that to what it would rent for. Knowing this would let me determine what type of return I could get on that cash. I would use this to help with financing decisions. Next, depending on your credit, I would look at a simple line of credit. Wells Fargo does an easy, unsecured, personal line of credit. Then you could also look at Sofi, Prosper, and similar sites. These options usually have very little fees compared to getting a loan against the property and needing a title company and/or a real estate attorney involved.

While the tenant moving out and needing to do the rehab sooner than expected, I like staging renovations on multi families across a few years. Renovate the units as the tenants move it, it means less capital all at once, and you get cash flow from the other units while the unit is question is being updated.

1 Reply

Cindy M.

OP

Franklin Square, NY · Member since 2017 · 3 posts · 2 votes

8y

Hi Andrew, Thanks so much for your time in responding! It is much appreciated...I did brace myself for "Oh No, why did you do that?" type comments, but it seems I might be on track. 20%+closing +++ down is tough and also a risk and your credit is got to be good enough for a bank so it seemed on target... but the thought of Hard Money and deals that encompass Balloon loans, and variable rates etc., are scary to me! So I just got a regular commercial loan but wasn't sure or don't know enough yet to say, "It was the best choice of loan."

On the 2nd part, my building like most building's in that specific CT area is like cutting a house in 4 equal Parts, they are like 100 yr old big houses that have been turned into multi-families. In this case 4 units. To get a visual, is a basement dirt floor, no entry, but private; 1st floor kitchen & living room, however they just threw a stove & frig, in a room, so, I would have to put in an actual kitchen; 3rd floor 2 bedrooms & full bath (its nasty and needs a full gut), 4th Floor is an attic that is like a full floor so it's a nice perk to store stuff; but the condition is beyond what I can describe...it's like you owned a building for 50 years and you did no renovation EVER and that's the condition. I think the carpet is literally 100 yrs old. So, a 'diamond in ruff'! Lol.

The rent in this condition is $750.

The market area can run $650 - $1100 (only brand new construction gets higher than that)

After a Renovation - I could would most likely get about $950-$1000 which is realistic. For me, to do a total renovation on a unit will cost about $10K maybe $12.5 if I put new appliances. So, now you know the numbers and the rent...is it worth the renovation expense?

My problem is how do I put in a new kitchen etc., and then not change the floors and leave the 100 yr old carpet...???

Thanks again, so interested in what you would have to reply...

0 Reply

Jack P.

Columbus, GA · Member since 2017 · 88 posts · 115 votes

8y

Your financing sounds solid. Everything else...not so much.

For reference, my last reno of ~1200 sf cost $25k in materials alone, using low-priced products from Lowes.

I'm also confused on the layout of the property. This is 4 units? And total rent is $750? It sounds like you bought a property that definitely isn't up to code, and not suitable for renters (dirt floor?). I wouldn't be surprised that if an inspector catches this, you'd be susceptible to huge fines. Good that you bought it as an LLC, because it sounds like a law suit waiting to happen.

If I'm reading this correctly, my recommendation would be to encourage the tenants to move, then start over with a new design, making sure to incorporate someone who knows a little about building codes. Chalk it up as a learning experience that costs you a little money.

0 Reply

Jason D.

Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes

8y

@Cindy M. people seem to have a hard time comprehending what you have written 😊. You haven't given enough info to comment on the deal itself but I'll say that the financing sounds pretty good. The prepayment penalty isn't ideal but based on your goals, it sound like it'll work. $10k - $12k sounds a little light for renovations. New kitchen, bath, floors, etc... could end up being closer to $20k. You could simply get a personal loan or 401k loan (if possible) to cover the renovation. If you invest $15 - $20k in each apartment to raise rents $250/mo, that's about break even unless you can find long term financing to do it. But It will force appreciation which could help in financing your next properties.

0 Reply

Rick SantasierePro Member

Real Estate Broker · Granby, CT · Member since 2015 · 694 posts · 317 votes

8y

@Cindy M. it sounds like your financing is fine. Rehab costs are definitely higher than we ever "think," and most newbies (we all did it) didn't budget well the first few times. The dirt basement and there being a dwelling down there is concerning, for sure. I would check all your local codes, and ensure each unit is up to par. A few trips to the town hall can help with some questions you may have. It is fairly common for out of state investors (especially NY) to get really excited about the thoughts of owning a MFR at prices that the C Class areas in CT offer.

Did you work with an established real estate agent in this transaction? Are you working with a good property management company? If the property is in rough shape, you might have a hard time getting a decent PM.

1 Reply

Cindy M.

OP

Franklin Square, NY · Member since 2017 · 3 posts · 2 votes

8y

Hi Guys, Thank you, Jack, Jason & Rick for your replies! Jack, and yes going to the building dept., tomorrow to get book on all codes but I think you misunderstood...the basement area is a dirt floor but not considered livable space...the other 2 floors (kitchen area, living area & 3rd floor 2 bedrooms & bath, and 4th floor which is a storage/attic and also considered not livable space. Like its own townhouse, it's private and each unit has its own entrance and 2 spots for parking and location where you can walk if you want to get a container of milk. I liked it for those reasons instantly, and can look beyond the cosmetic TLC within b/c it can be rectified; but of course I am from NY which we value space and privacy as a privilege, and you can only have any of those things if you can afford it. Your from Georgia it's like a different world to us...

Rick, going down to town hall tomorrow. Yes, its very exciting b/c it's affordable to buy and you can pay it off within 5 yrs and it cash flow's from day one as opposed to NY where everything starts at almost $1M and the only people that will ever see a profit will be your children.

I did use a real estate agent for this purchase. These type of properties, getting an all rented property for cheaper to fix-up later (basically the brrrr strategy) it pays for itself and cash flows are the only properties I am interested in...less work the better but the renovated properties still seem to be out of business model in terms of coming up with the down payment and re-payment strategy of being able to pay it off in 5-7yrs as we don't need the profits to live we just continually pay more principal from the rent. Since you are in CT I will call you directly to discuss, maybe you have some of these type of properties...if so, I would be interested.

Jason, worried about your comments...$20K just seems so much to invest on a unit that I might get $250 more in rent, if lucky, and good tenants that will stay awhile. To invest more than $12K feels like I am pushing it..I feel that I must keep the budget low and be conservative. I want to get more doors, my goal is 20 units and I only have 4, my thoughts are that if I dump all money and resources of financing into one renovation and cosmetics...I will never buy more buildings and get to my goal. I hope to be at at least 20 by the end of 2018.

0 Reply

Filipe Pereira

Property Manager · Windsor Locks, CT · Member since 2016 · 1k+ posts · 1k+ votes

8y

Originally posted by @Cindy M.:

Hi Guys, Thank you, Jack, Jason & Rick for your replies! Jack, and yes going to the building dept., tomorrow to get book on all codes but I think you misunderstood...the basement area is a dirt floor but not considered livable space...the other 2 floors (kitchen area, living area & 3rd floor 2 bedrooms & bath, and 4th floor which is a storage/attic and also considered not livable space. Like its own townhouse, it's private and each unit has its own entrance and 2 spots for parking and location where you can walk if you want to get a container of milk. I liked it for those reasons instantly, and can look beyond the cosmetic TLC within b/c it can be rectified; but of course I am from NY which we value space and privacy as a privilege, and you can only have any of those things if you can afford it. Your from Georgia it's like a different world to us...

Rick, going down to town hall tomorrow. Yes, its very exciting b/c it's affordable to buy and you can pay it off within 5 yrs and it cash flow's from day one as opposed to NY where everything starts at almost $1M and the only people that will ever see a profit will be your children.

I did use a real estate agent for this purchase. These type of properties, getting an all rented property for cheaper to fix-up later (basically the brrrr strategy) it pays for itself and cash flows are the only properties I am interested in...less work the better but the renovated properties still seem to be out of business model in terms of coming up with the down payment and re-payment strategy of being able to pay it off in 5-7yrs as we don't need the profits to live we just continually pay more principal from the rent. Since you are in CT I will call you directly to discuss, maybe you have some of these type of properties...if so, I would be interested.

Jason, worried about your comments...$20K just seems so much to invest on a unit that I might get $250 more in rent, if lucky, and good tenants that will stay awhile. To invest more than $12K feels like I am pushing it..I feel that I must keep the budget low and be conservative. I want to get more doors, my goal is 20 units and I only have 4, my thoughts are that if I dump all money and resources of financing into one renovation and cosmetics...I will never buy more buildings and get to my goal. I hope to be at at least 20 by the end of 2018.

Cindy, what part of CT is this in? Will you be overseeing the rehab? 20K might be a bit much, but it might not be. I re-did kitchen, floors, and bathroom for 7K worth of materials. Relatively small spaces. I don't think 20K is unrealistic depending on size and quality of labor. Make sure you can get someone to oversee the project if you can't.

1 Reply

William CollinsPro Member

Investor · Rocky Hill, CT · Member since 2013 · 373 posts · 299 votes

8y

With this investment where this investment in Connecticut actually is to help us and let us know what type of Renovations potentially needed. If the house has a dirt floor usually is of significant age which means though it might not look like you have knob and tube wiring. I'd be very cautious about when you open the walls because I have found many places that have. Also when you look at the age of the plumbing a lot of it will probably be cast iron or galvanized. Depending on how long it's been neglected those pipes which are in the wall could have rot. So one of The Tell-Tale things to look for is where the down down drain it goes all the way into the basement at connection to the sewer and check those pipes for any type of leakage of rot.

0 Reply

Just did my first Deal and bought a 4 Plex! Need Advice Stat!

Just did my first Deal and bought a 4 Plex! Need Advice Stat!

Most Popular Reply

9 Replies