Real Estate Agent · Delaware County, PA · Member since 2022 · 15 posts · 3 votes
4500 sq ft. commercial space recently rezoned for 8 2bd/2bth apartments in a great location with an excellent school district and huge upside! I have been looking at this property for 2 months as it's just sitting vacant and I drive by it every day. I found the seller, called him and he would like to sell before dealing with the "hassle" of renovating it. We are meeting next week to walk the plans. Market value in it's current condition is between 650-700K my projected value after completion is 1.5M, a 7.9% cap. How do I fund it? Purchase, reno and refi into a long term loan product? Thanks in advance!
The most straightforward way would be to use a hard money lender to fund the purchase and renovation, then refi into a longer-term commercial loan product. I'm sure there are several HML's in the Philly area here on BP, but I've used Direct Portfolio Lending and they're based in PA.
If the seller is motivated (due to lack of interest in existing condition), he might be willing to carry the note and seller finance through the rehab, which would reduce your upfront costs. It depends on what he needs to get out of the sale and when.
What is your projected rehab budget? $800k spread between current value and ARV doesn't leave much room to build out 8 apartments.
I will bring a contractor with me when I do my walk-through and get some idea of numbers on the reno. What if I raised 600K and offered to pay in cash so I wouldn't need money for the purchase. Would I still go hard-money for the reno? Let's say I have 6 investors put in 100K each on a 12 month note. Could I use a DSR loan based on the proforma with a property not rented yet?
That is one strategy, depending on your access to capital and investors, though I'm not sure the headache of managing multiple private investors will be worth it. A hard money lender can fund 100% of the reno along with the purchase at the lower of 90% loan-to-cost or 70% loan-to-value (ARV). They'll likely use rent comps for the area and cap rate to determine the ARV and back into the other numbers once you have a reno budget.
It's not likely in this market to be able to get your DSCR loan based on the pro forma alone, you may need to reach a lease-up threshold before you'd qualify for the refi, so you'd want to build in that time on the hard money note.
You're welcome! Always helpful and important to start conversations early with both lenders (HM and commercial) to make sure the deal can work before you make commitments to the property.
Funding for something like this is pretty easy. The hard part is quantifying your numbers, your experience level, your liquidity, and finding the right GC to perform the renovations. This sounds like an Adaptive Reuse project. Feel free to reach out to discuss.
@Jimmy Lynn may have some thoughts on the financing.
As for the rehab, I agree with @Eric Greenberg this is a very heavy lift and depending on the area it may require things like a sprinkler system, alarm system, ADA accessibility, high voltage power, and several other things that can easily blow up a budget. At face value I would worry that the cost of the project vs the ARV and purchase price would not justify taking it on.
I would love to hear more specifics and see if there is a way I can get involved. This is exactly the type of project I have been looking for.