Quad Apartment Complex - Worth Pursuing?

Question

I would like some advice on an out-of-town investment opportunity (my home town).  This is for a 4-door 1975-built quad, 2 level, brick.  Each unit has 2 Bedrooms, 1 Bathroom, Living Room and Kitchen, and comes with a washer/dryer combo. There are separate meters for all 4 units, each over 800 sq. ft.  It is priced at $175,000, (I would hope to buy at $160 as it needs a lot of work) and owner is currently renting at $450 - my realtor and property managers say these should be in the $600 range, possible $650.  The owner was local, did his own PM and maintenance, and struggled to keep up.

Location is in the "Ohio Valley" section of Ohio/West Virginia.  Not super great price escalations.  I already own a small 1 BR rental house in this market so have a relationship with a property manager.

Needs a fair amount of work - bathroom remodels, new carpet and paint (some current residents are smoking in the apartments) , ideally I would invest in expanding the parking situation.  Roof needs some work around flashing to prevent leaks, a few windows need panes replaced, etc.  No way I can BRRRR this as I would have to put too much into the rehab - at least $30-40k as a round guess.  I have a contractor who can redo each bathroom in one day for $5,000 with all new everything from floor up, I might be able to improve this with additional estimates.

If I got rents up to $550 per month, after fire and police fees, taxes, PM, insurance and setting $300 per month in reserve, I would cash flow $350 per month (assuming 90% occupancy).  If I got rents to $600 the cash flow is about $525 per month.  I would have to use this cash flow to pay back the rehab costs (I have not put rehab costs into the cash flow equation).

If I put $30k in the rehab (and this about all I have to put in after paying 20% down) the cash-on-cash return is 8.6% at $600 per rental, 5.5% at $550 per rental.  At $2,400 per month income, rent is 1.25% of the purchase price + $30k rehab.

My Question: Is this worth pursuing further - i.e. getting an inspection, contractor in for estimates, etc.  This is a pure cash flow play, as property prices will not increase at a high pace here.

Appreciate any insight.

Jerry Padilla · Answer

@Brian L Dowler

Do you know what the after repair value would be for all the renovations?

I would consider a couple of options to keep your out of pocket costs as low as possible as well as increasing the rents and cash flow.

One option is to remodel the property to get max rents and value - then cash out refinance at 6 months. For a 4 unit you could get 70% of the current appraised value back out to pay yourself back for the costs.

Another option, since it looks like you have less than 4 financed properties, including subject you could also do a renovation loan on the property, that would allow you to incorporate the renovation costs into your loan and you would just have to come up with the down payment.

Hadar Orkibi · Answer

@Brian L Dowler if you are buying at 160k + 30k + some origination fees etc you will be all in by say $195k.  your ARV better be over $280k. 70% of that would be BRRRR.

Get a local Agent to pull a CMA for the market from the MLS. see what it could be worth per door in that area.

Bjorn Ahlblad · Answer

@Brian L Dowler fixing distressed properties and upgrading the tenant quality is certainly the way to make money provided you can control all those moving parts you described. The fact that you are out of town; would make it too risky for me. I applaud what you are wanting to do.

I have not seen the building, don't know anything about the area etc. But those 500 dollar a month tenants are just too much work and way too much risk. If you were to get a lot more CF from the rehab it would be different. But all that risk and work-I would want a much bigger payback.

Bjorn Ahlblad · Answer

@Brian L Dowler fixing distressed properties and upgrading the tenant quality is certainly the way to make money provided you can control all those moving parts you described. The fact that you are out of town; would make it too risky for me. I applaud what you are wanting to do.

I have not seen the building, don't know anything about the area etc. But those 500 dollar a month tenants are just too much work and way too much risk. If you were to get a lot more CF from the rehab it would be different. But all that risk and work-I would want a much bigger payback.

James Allen · Answer

@Brian L Dowler - I wouldn't do it. I would seriously consider tenant quality when buying a property. 8.6% Return is not bad but for rents at $550 or $600 per 2 bed unit tells me you're most likely not in a great area. What might pen out on paper at 8.6% cash on cash will very likely work out a lot less in real life. If you're fine with the tenant quality these rents attract, then I'd at least shoot for a 12-15% minimum ROI.

Brian L Dowler · Answer

Jerry, I am not sure of the after value repair.  But incorporating the rehab costs into the loan then getting a refinance at 70% would possibly be attractive.  My current bank is telling me 5.5% to finance the purchase, but they do not finance the rehab.

What kind of rates/points would I be looking at for a ~ $200k loan to finance the purchase and rehab?  Credit scores above 800...

Quad Apartment Complex - Worth Pursuing?

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