I possess 1/3rd of a 40 unit 4 level building in the U-District of Seattle. The building was built in the 60s and was last renovated in the 80s. The interior is old and the entire building could use a complete renovation, with possibly updating the exterior and grounds. We have been getting offers for the building in the 8-9M range. The building currently only produces a in pocket cash flow of 6-9K a month. The existing mortgage is worth 1.8M. We charge on the low end for rent in the area, both for studios and 1B1b apartments. I have a friend who suggests I buy out the other 2 owners and renovate the property with a HUD loan, rather than selling it. This would bring the mortgage to 6.2M including a 1M renovation. Though that is completely estimated. I am actually unsure on the cost for renovation. I figured the high end would be 20K a unit, and a couple hundred thousand for exterior and interior updates. The property is zoned for more levels but I doubt I can leverage the existing equity to acquire enough money to build them.
Does anyone have experience in the Seattle area? I am unsure if this idea will work simply because the new mortgage might eat up all the income, even with the increase in rentals. The other two owners would like out and want to sell. I would like to stay in and try to turn this building into something better. What are some things to consider with this type of venture?
Given the caveat that there are no one way of doing things, some things that come to mind:
- Are your other owners willing to owner finance it? This can be tax advantageous for them (minimize capital gains), allow you to get better financing/manage cash flow/negotiate on terms (IO months, etc), provide them long-term cash flow secured against an asset that they have knowledge about.
- Have you considered bringing on a partner who provides capital/re-positioning experience (you provide the sweat equity and your existing share in the building)? This has multiple benefits apart from just getting financing. Developing a relationship with an experienced partner with re-positioning experience can help you learn things quickly. Think of this relationship as that of a mentor/mentee. Furthermore, you can leverage this relationship to other projects. Experienced people either have multiple projects or can introduce you to other successful people who can turbo-charge your progress. This has greatly helped me in quickly picking up the finer points (thanks: @David Thompson and @Reed Goossens ). Plus, if this is a good deal, experienced investors will be more than happy to work with you.
- Have you tried to raise capital from your existing network? At first, this can be daunting as we all feel "weird" asking for money. But you are not asking for money, you are pitching a business idea through which your network (and you) can both make money. Being 1/3 owner of the building with insider knowledge of the building gives you a leg up over other investors.
- Combine aspects of the above: Owner financing and bringing on an experienced partner/investor from your network.
Best of luck!
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