Brrr multi multifamily deal?

Question

This year I jumped feet first into my first deal. I purchased a portfolio from a local investor. They are 5 buildings that have 15 doors. They were turnkey and already fully occupied. They cash flow, but I put all of my equity into the deal to purchase them and have nothing left to rehab them and want to pull my money back out. I took out a heloc for my 20% down payment and closing costs. I bought them for roughly $405,000 and have $110,000 of my money in it. Since the purchase I have taken my profits and put on 1 new roof, 1 new hot water tank, and 2 new stoves. I have 1 more roof to do for about $8,000 and then some more renovations to do.

My question is do i keep using my profits to slowly fix and remodel or find money somewhere to get everything rehabbed then refinance?

John Poling · Answer

@Bradley Sriro putting in another $30k I should be able to have an arv of 500k. Refinancing and pull it out or sell and make some money. Id have options. Worse case i can pull most of my money out and leave some in... which I'm ok with.

Bradley Sriro · Answer

One rule that I never compromise on is never ever paying more than appraised value. Even though the spread on your payment vs. rents received is decent, if you account for all of the deferred maintenance expenses you are now having to pay for, you are most likely in the red. What do you estimate the ARV to be for the portfolio after you make the necessary repairs to re-sell it? The $20,000 that you overpaid may have been ok to you initially; however, it is still going to hit your bottom line one way or the other when you sell. You would need the property to appreciate significantly to turn a $30-$50k profit when selling as you previously mentioned.

As a general rule of thumb, a portfolio of properties in the type of area and with the type of tenants you have in place don't really appreciate in value to quickly. That is the trade off. The cash flow may be good... but the appreciation not so much. Sounds like you have a bit of a challenge on your hands. But use it as a learning experience! All the best.

John Poling · Answer

@Bradley Sriro I paid a little over appraised value. They appraised at $385,000 I'm in them for $405,000. The rents are $8250/month and my costs are around $5,800. So i was willing to pay a little more than i wanted knowing it needed some upgrades cuz it did cash flow from day 1.

Bradley Sriro · Answer

@John Poling I guess the big question is what the current as is value of the portfolio is vs. what the ARV would be after any renovations you plan to do? I know you mentioned putting down 20%... but depending on how long you have owned them this year and if you bought the portfolio at a discount, you may already have enough equity built up to refi and pull out what you need to complete the renovations. Using the monthly cash flow to make the repairs isn't a bad option but it will take you quite a while. If your goal is to get the portfolio sold sooner than later, I think you already answered your own question... find the money to rehab and force appreciation, and then sell to cash out so you can move on to the other market you are interested in.

John Poling · Answer

@AJ H. Agreed. My plan was to keep these and let them cashflow. But i need to get my money out of these asap as i want to do other projects in another market that is way better and has a ton of opportunities.  So i wouldn't be upset if i brrr them. I can then test the market once done and if i can get more money than expected out of them all the while losing the headaches of a C class tenant base then its a win win.

Aaron W. · Answer

@John Poling  You are right! There will always be projects in MF properties. Definitely don't want to over-renovate the properties, but should make the units comfortable and livable to your tenants. If your goal is to sell it soon, then you can consider leaving some meat on the bones for the next investor to add value. Another option is to completely rehab the building then resell it as a turnkey property; however, the expense to do this may not be worth it.

Good luck!

John Poling · Answer

@AJ H.

Rehab is limitless... not sure how much i should actually do... some of the units have been done and dont need much. I figure another $30k will do quite a bit. I live in a very depressed area so im not sure how much i can actually raise the rents as these tenants are already scraping to get by. I am considering rehabbing the major issues and selling to gain my money back and possibly pocket $30-50k as I  feel i bought them right and they would sell quick.

Aaron W. · Answer

@John Poling Congrats for jumping in! This is an exciting journey!

How much rehab/reno do you still have to do?  You mention this was a turnkey property, but it seems like there are a lot of projects for a turnkey!

Did you budget for repairs and capital expenditures when you ran the numbers on this property?  Those are line items that should be built into your analysis and underwriting before determining whether to acquire a property. This way, you can still build in cash flow for your properties. Of course, sometimes it is hard to know the amount of repairs and capex until you start the projects.

How much value do you believe your rehab/reno can bring up the property value?  As this is commercial, you'll want to look at the increase in NOI through your renovations. Will this somehow get you higher rents or help reduce expenses somewhere?

This is an exciting adventure and wish you luck with everything!