What is your rehab limit for a multi-family rental?

2 Replies

Hey BP community!

Currently looking at a 4-Unit building in southern California. This property has a NOI of roughly $450/month as is. I am in contract for 20k below asking and currently waiting on appraisal (which i know is a huge deciding factor). The building was built in 1920 and after first inspection, needs nearly everything updated. To condense the list to the important ones:

New electrical wiring/Panel

New Plumbing

Wooden window frames are falling apart (termite damage)

Wooden steps to back yard and 2nd floor units need to be replaced (termite damage)

Flat roof needs maintenance (leaks)

My Question is, where does an investor typically draw the line and say that there's too many repairs that need to be made?  What numbers am I missing in regards to cash on cash return?  Any help is always greatly appreciated.

It all depends on what you are happy with return wise. If the property needs as much work as you say, you may not be able to get a conventional loan on it.

Follow your numbers.... KNOW the percentage of return you need for profit, in the time-period most appropriate for you. (For me, the minimum would be 14% return of the amount of money used to purchase, renovate, and re-sell.) The key is that you define your financial return requirements, limitations, and expectations. Once you know the amount of return you want, THEN use that value to define how much money can be spent. 

As a side-note.... Ensure that you are not impacted by biased renovation "necessities". As I get 3-bids for renovation, I ask "why" ALOT. "Why do I need to spend $10K on plumbing?" Make sure the answer is clear and logical. The answers you receive from the 3-different contractors can (1) educate you for this project or the next, and (2) clarify a contractor's opinion versus what is an actual necessity.

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