I am considering purchasing a large (50+) unit property. I believe that the market currently values condos much higher than rent, and that this particular property is under-market rent. I believe I can purchase this property using a typical BRRRR strategy (add value, raise rents, refinance), but I think there is significantly more value in buying and then slowly converting selling off the properties.
Would love to chat with anyone who has used this strategy before. A few questions:
1) What type of loan would you use for this? Is it a standard long-term loan?
2) How does the relationship with the bank change if you are selling pieces of the property over the long term (e.g., the asset used to back the loan is consistently changing)?
2a. Do you need to pay back portions of the loan each time there is a condo sale? How is this determined?
2b. Do you pay back investors each time there is a condo sale?
@Ezra Okon to answer your questions:
1. You would use a bridge loan specifically designed for this strategy from a lender that has done it before.
2. You can’t sell off units if you have a standard commercial Multifamily loan. See #1 above. So the relationship doesn’t change, the lender would change when your strategy switches from rental to sales. In other words, you’d refinance your loan with the bridge loan.
2a. Yes. Depends on the lender. They might require 100% of the sales proceeds until the loan is paid off, with you getting proceeds only after that. Or, they might set what’s called a par value for each unit. What they do here is look at each floor plan and determine how to carve up the loan on a per unit basis, such that more expensive units would have a higher par value, etc. Then as each unit sells the lender gets 125% of the par value of each sale.
2b. Yes, unless the lender is getting all of the proceeds, in which case you would start returning capital after the loan is paid off and you start receiving sales proceeds.
You should also know that you can’t typically just sell off units in an apartment building. You have to first convert it to Condos. This could be as simple as doing some paperwork or as complicated as doing major construction to bring the building and units up to condo standards or even up to current building code. Most likely there will be both local and state approvals required before any sales take place and there are very specific rules on offering tenants first rights and/or taking and handling of deposits so you’ll want to engage specialized legal counsel to assist you with the details.
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