I have an Opportunity to purchase 5 unit mult-family property in need of substantial rehab. Currently the property is empty. Comps show ARV of the 5-unit is $607,000. Monthly Revenue potential is $5200/mo. The purchase price is $350K and the rehab is estimated at $150K.
Seeking funding scenarios for up to four partners.
What are advantages/disadvantages of partners funding the purchase price of $350K with cash, and financing the rehab $150K?
What are Scenarios for payoff and return on investment for partners?
What is an attractive, reasonable deal for partners, i.e. rate of return on investment; Length of time for payout of capital investment?
I am Interested in what has worked for people who have put together these private deals or what would be incentive for a passive investor?
I've not put together a deal involving partners before and want to know creative solutions from this active and experienced audience.
First, the ARV seems pretty high for a property that is supposed to bring in $5,200 per month gross. That is like a 5.14% Cap Rate (assuming 50% expenses). The 1 month LIBOR is currently 3.57%. In other words, if someone bought this from you for $607k; they will most likely be paying the bank to own the property.
Next, this is a HEAVY value-add project. I purchased a vacant 5-unit in 2009 that was completely vacant and I went over my budget. I would make sure to triple check your numbers and make sure you have a sizeable buffer.
Lastly, you mentioned passive investors. To legally have passive investors in a deal, you need to create a syndication which would be too expensive for this deal to make sense. I would suggest setting up a JV; BUT, make sure that everyone is active (has an active role) or you are breaking SEC rules. 4 JV partners is a lot; maybe try to find just 1 or 2 (max) others to partner with.
*Not trying to be negative. Just explaining what my experiences have been with projects like this.
First, the ARV seems pretty high for a property that is supposed to bring in $5,200 per month gross. That is like a 5.14% Cap Rate (assuming 50% expenses). The 1 month LIBOR is currently 3.57%. In other words, if someone bought this from you for $607k; they will most likely be paying the bank to own the property.
Next, this is a HEAVY value-add project. I purchased a vacant 5-unit in 2009 that was completely vacant and I went over my budget. I would make sure to triple check your numbers and make sure you have a sizeable buffer.
Lastly, you mentioned passive investors. To legally have passive investors in a deal, you need to create a syndication which would be too expensive for this deal to make sense. I would suggest setting up a JV; BUT, make sure that everyone is active (has an active role) or you are breaking SEC rules. 4 JV partners is a lot; maybe try to find just 1 or 2 (max) others to partner with.
*Not trying to be negative. Just explaining what my experiences have been with projects like this.
I will surely re-visit all of my assumptions to make sure my numbers are correct. Relative to the $5200/month for the gross monthly revenue, this is conservative as the sq footage of units are generous and would likely support higher rents.
I am concerned about the about of rehab this 5-unit needs. Did you purchase your unit for cash and finance the rehab? At what point did you have a solid estimate of the rehab costs?
While you may have started out over budget on your rehab, how did you recover and make you deal successful?
I purchased it cash and paid cash for the rehab. Yes, I went over my rehab budget but, I purchased it in late 2009. My rehab budget could have tripled and I would have still made money. 2009 is very different from 2022. Increase your rehab budget and do out the numbers as a buyer at $607k. Interest rates will most likely increase 1-2 more times before you complete the rehab. I believe it will be difficult to get $607k for a property netting $31k a year with interest rates where they are.
First, the ARV seems pretty high for a property that is supposed to bring in $5,200 per month gross. That is like a 5.14% Cap Rate (assuming 50% expenses). The 1 month LIBOR is currently 3.57%. In other words, if someone bought this from you for $607k; they will most likely be paying the bank to own the property.
Next, this is a HEAVY value-add project. I purchased a vacant 5-unit in 2009 that was completely vacant and I went over my budget. I would make sure to triple check your numbers and make sure you have a sizeable buffer.
Lastly, you mentioned passive investors. To legally have passive investors in a deal, you need to create a syndication which would be too expensive for this deal to make sense. I would suggest setting up a JV; BUT, make sure that everyone is active (has an active role) or you are breaking SEC rules. 4 JV partners is a lot; maybe try to find just 1 or 2 (max) others to partner with.
*Not trying to be negative. Just explaining what my experiences have been with projects like this.
BOOM! He got the right answer!
I am trying to do the same for a client now. Purchase $4.5M with 800K reno <50% occupancy. Heavy reno is FUN.
Also talk to the seller.
"Hey seller when you are investing, what is the % that you need to make monthly in order for you to invest?" I bet he tells you 8-12% Min "Seller what is keeping you from rehabbing the property and renting it?"
And on top of that you need to make at least 30% on the money you add to the property. So that puts you all in at $420K approx. You are bringing the $ and doing the work.
Or you could buy it at 350K but that is the total purchase price with owner financing over 20 years.
You really need to have the property evaluated by experienced GC and investor & lender.
@Joyce D Raphael I did a similar deal years and went to a local bank and got a commercial loan. 20% down on the purchase price and they provided the remaining purchase + rehab funds up to 75% ARV. What's nice is that they do the appraisal in advance, so you know what the numbers will be and the funds you'll have.
Bank interest rates and not HML rates.
So something to keep in mind as an option. Good luck!
@Joyce D Raphael Those numbers seem off. Not to put you down as we all go through the numbers game but I agree with @Charles Carillo. 150k for a gut reno is VERY low. I did a medium rehab on a duplex and cost me 74k. It wasn't a gut, just upgrades. 5200/month pro forma would mean your exiting financing (long term stabilized loan) would need to be at reduced LTV for you to debt cover and you would leave cash in the deal. Either, lower the asking price to mid 200s or pass on this one.