Obtaining a CO on a 23% CAP 8 unit we are wanting to buy
Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes
Obtaining a CO on a 23% CAP 8 unit we are wanting to buy
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Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
13yWere those renovations 10 years ago done with permits?
Based on your experience with the building department, I'd guess you're in for some pain.
In most areas when you're dealing with a larger multi-unit building like this you will need to follow the stricter commercial building codes. Most cities here use the IRC (international residential code), but it applies only to SFRs and duplexes. I would consider getting a commercial contractor who's licensed in the city to come inspect the property with you. You may well have to pay them. They can walk through the building with you and discuss what might have to be done to get city approval.
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- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
Were those renovations 10 years ago done with permits?
Based on your experience with the building department, I'd guess you're in for some pain.
In most areas when you're dealing with a larger multi-unit building like this you will need to follow the stricter commercial building codes. Most cities here use the IRC (international residential code), but it applies only to SFRs and duplexes. I would consider getting a commercial contractor who's licensed in the city to come inspect the property with you. You may well have to pay them. They can walk through the building with you and discuss what might have to be done to get city approval.
- Realtor, General Contractor, and Developer · Redding, CA · Member since 2009 · 7k+ posts · 4k+ votes13y
@Ryan Edwards First off, Welcome to BP! As to your question, nobody on here can tell you what you will need to do to obtain a certificate of occupancy. You will need to GO IN PERSON to the Building Department, and talk to them. Jon is right in that finding a contractor that has experience in your area, and with doing the work on such a building is invaluable. With a building as old as that, one that hasn't been occupied for years, etc., it could be a challenge. Trying to do it with no experience in construction, or the process will probably result in a nightmare.
We have found over the years that working WITH building depts., as opposed to viewing them in a negative light will get you much further, easier. Go in seeking their wisdom on the process you are trying to conquer and you will have a better response. Some regulations are ridiculous, but some actually do have value when it comes to health and safety. On an extremely old building, an abundance of caution is going to be required, lest it result in an accident, and they are looking at their liability if they miss something.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
The funding is solid. There are no issues there. We put a contingency in the contract for the inspection so if it will cost too much then we won't be purchasing it.
I just spoke with a licensed commercial inspector about obtaining a CO and he said it shouldn't be too hard to get. He said typically all they care about is the fact that light switches work and plug-ins work and basically stuff inside the unit. He mentioned some basic safety things like stairs having rails and smoke detectors.
My concern is once we get the report and close on the property, then will the city step in and tell us we have to spend tons of money on the place (more tha we have) and mess all the plans up? From talking to the inspector it doesn't sound like it.
Does any one have any first hand experience with dealing with the city on deals like this?
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
Jon Holdman; I don't know if they pulled permits when they remodeled or not. is that something the city will have record of?
Karen; Thank you for your perspective. I definitely see the value in coming at it from that mind set and will do so accordingly.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
Every city is going to be different, so you need to talk to the city's inspector yourself. They will usually be helpful if they know you're trying to go by the book and just need help understanding. I've seen cities less than 3 miles from each other operate completely different just because they have different feeling on what is and isn't required so the actual inspector will be your best source of information.
One thing you may have going for you is depending on the sentiment in the area, the city may be very glad that you are just getting an asset performing again and removing a vacant property from the area. It all just really depends on your specific town.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
100 year old building with no unforeseen costs??
You will have unforseen costs. Even with experienced investors who do this over and over they have a strong contingency fund built into the pro-forma to model out worse case scenario.
It's been vacant for the last 8 years and hasn't been stripped of electrical or the A/C's??
When looking at a totally vacant apartment building you have to run the numbers to model when it will be fully performing. For example you buy with cash and then want to refi out in 18 months. A building that age in your area you determine fully performing sells at a 10 cap but the area is improving and cap rate compression is happening. You model out that your exit will be a 9 cap in 18 months.
If you buy the shell at say 3,000 a unit for 24,000 plus closing costs and inspections etc. so figure 30,000 all in. Then the estimate is 10,000 rehab a unit for 80,000. 80,000 and 30,000 is 110,000 plus you will have ongoing holding costs.
Say each unit is a 2 bed and upon rehab completion gets 700 a unit. You put in separate meters so that landlord does not pay water.
700 X 12 = 8,400 X 8 units = 67,200 gross expected income
67,200 GEI / .50 costs = 33,600 NOI
Reselling at a 9 cap you would get a sales price of around 380,000.
380,000 - 110,000 (purchase costs and rehab) - resale commissions ( 22,800 at 6%) - closings costs 8,000 - 12,000 in additional holding costs = 227,200 gross proceeds from the sale.
Now if the resale purchaser wants you to carry a 10% second note or cover their other closing costs then that number will be much smaller.
The city can add additional things such as sprinklers to go in etc. that substantially raise rehab costs.
- Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes13y
What about asbestos and lead-based paint? Are you also having a good consultant inspect for those? You should, as they add cost and liability.
What about the neighborhood? If it was vacant that long, there is a reason(s).
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
Yes, the city will have records of permits.
Things like asbestos, lead based paint and sprinklers may well be issues. If its been empty for eight years seems like its certain to need significant work. Often when you do big remodels you have to bring a property up to current codes, especially on major safety points. For instance, I'm remodeling my bath right now. Because I moved two walls in adjacent bedrooms, I had to convert the bedrooms to arc fault breakers. And completely rewire one of them. And install hard-wired CO detectors throughout the house.
Yes, I've deal with inspectors several times, though not on a multi like this. And I've dealt with building and planning/zoning departments on properties pre-purchase that I ended up not buying. My experience is that they are generally willing to work with you, if you're trying to do things right. If you're looking for ways to skimp and get away with as little as possible they can become testy and get picky. In one case, where we took back a property from a rehabber who had done some work without permits, they dragged us over the coals and made us correct stuff the rehabber hadn't touched, including digging up part of the finished basement and opening up a number of walls.
I also had a call some years ago from a lady seeking money. She had a multi unit building, similar to yours. The city had shut it down completely and kicked out all the tenants, due to building issues. We didn't get into exactly what. She had corrected the issues, but was now broke and had an empty building.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
Joel; forgive me foe asking as I am new to this whole real estate arena. But if you are paying cash for everything why or what would be the benefit to re-financing it? I hear this talked about a lot and am wondering why you wouldn't just keep it paid for and pocket all the money?
Stephen; The area is very good, for renting any ways. I did some research on who all has owned it before and it looks like some one bought it in 1999 and after rehabbing it sold it to an investor and then the bank took it from him in 2003 and it has been sold a couple times since then and the person we are buying it from bought it at a sheriffs sale. So no one has worked on it for a while it seems. Back in 1999 it sold for way more than it was bought for so I assume that is when the rehab was done.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
jon; Wow that sounds like a big deal. Luckily I am not easily dis-heartened. I don't mind being the guy that has to jump through all the hoops to get a property up to code. As long as there is a light at the end of the tunnel and we have the funds to do it. Although I am new and only seeing the end result of what it will be when we are done, I am very much willing to listen to the experience of others and want to make an informed and realistic decision as possible.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
jon; Also while on the topic of lead and asbestos... I am almost positive it has lead based paint and am not sure about asbestos although I know it had it when it was built. how big of an issue are these things? I know the health dept. makes them out to be a BIG deal but in reality aren't they a non issue. Isn't it just a matter of a disclaimer on the move in contract or is there more to it?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes13y
A bunch of questions there.
Absolutely do not be discourage by the problems. Learn from them and plan for problems and you'll be OK. Evalute properties realistically and plan for the irregular but very much expected issues and you'll be OK.
Returns from rentals are often higher with some leverage. Absolute returns can be higher with free and clear properties but percentage returns are often higher with leverage.
Asbestos and lead paint are just a problem to be dealt with. They are certainly not non-issues. The EPA has put in place safe working guidelines for dealing with lead paint, for example. Follow these (or, really, be sure your contractors follow these) and you'll be fine. Violate them and you can turn small problem into a big one. For example, lead paint can often be encapsulated by painting over it. But go at it with a belt sander and you've just contaminated a large area with lead dust. When you rent, there are disclosure forms you have to use with the tenants and you have to give them a phamplet about lead issues:
Failure to provide the phamplet and get the signed form can result in fines and penalties.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
As far as the lead/asbestos issue goes they aren't a current health problem as long as you don't disturb it. But anytime you do maintenance you will be disturbing it and need to mitigate. If you have asbestos on heating plumbing let's say, your $20K heating replacement may now cost $30K because of the expense of remediation prior. Here's a thread with an issue that could present even if you try to do everything right.
http://www.biggerpockets.com/forums/52/topics/93102-lead-paint-nightmare
As to why you don't just keep a cash flow property unleveraged it has to do with your actual return on investment. If you can borrow money at say 6% and the building is producing a better return than that you are better served taking money out and investing it into something that yields a higher return. Jeff Brown has a good Blog article here.
http://www.biggerpockets.com/renewsblog/2013/07/03/real-estate-debt-2/
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
Thank you all very much for the education you all are providing me and any one else that reads this. That is very good to know.
Are there any other issues a noobie should investigate and or know before venturing into this game as far as getting the building up to "snuff" or things to look out for that I am not thinking about before we close on this prop?
Oh and as far as the money thing goes. my investors want to be paid back in full before I can leverage the prop. Also once they are paid back we will be 50/50 partners. Is this aba idea. The money ppl are family and are very easy to work with.
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes13y
How your partnership is set up is dependent on you guys.
The simplest initially would be if they lend you the money and record a note just like any bank would do. Then you could refinance out of the loan whenever the building is stabilized. Rate and term refi's are easier than cash out refi's so that helps move things along faster. This also protects their investment because if things go south they have legal remedy to take they property and sell it to protect their investment.
How you structure the partnership is up to you, and I would involve an attorney to make sure you have thought of everything. Do a search here and you'll see what has been recommended in the past in these kind of agreements. In the end it comes down to who is doing what, and how involved each person wants to be.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
thanks matt
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes13y
Hi Ryan,
Please do not take offense to what I am about to say. Since you are learning about a property this size to turnaround plus looking at family money as the investment partners that changes the whole dynamic of investing in this property.
You have to make sure under any circumstances that this investment will be a success or the collateral damage could live on forever.
Whether it is an outside investor or not you should make sure the money is paid back but especially anything with family involved.
In a down market cycle that is improving to neutral investors usually want to churn the money as much as possible to pick up the most deals. By refinancing you are paying off the money you have invested as long as it does not go above a certain ltv on the refi and then taking the money with profits and re-investing into other deals. The cash out refi is seen as a loan. So most cash out refi and then keep investing and doing 1031's on existing properties until they wipe out gains upon leaving their estate to their heirs.
It's more complex that than but the general idea.
- Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes13y
Besides being a real estate investor, I'm president of an environmental consulting company (see my signature), and an asbestos & lead expert, so do not hesitate to ask any and all questions.
Besides EPA, OSHA also regulates both. Some states, air pollution control districts, counties, and even a few cities also have their regulations. In addition to regulatory liability, there is lawsuit liability for exposing people (employees, tenants, neighbors).
See my consulting company's web site news Section for some of my published magazine articles on these topics.
- Real Estate Agent · Edmond, OK · Member since 2013 · 50 posts · 14 votes13y
joel; why would I take offense to that? You are only stating the obvious. But we are getting this prop at such a good price that it is very hard to pass up. like I said after purchase and fix up and everything else it has a 23% CAP rate and that's if we have to spend as much fixing it up as we buy it for.
Stephen; well you are just the person I need to talk to then. I think I am getting the point on LBP but what about asbestos? Is it pretty much the same as LBP where as long as you don't disturb it you are good? And what in old buildings like this could have asb. in it?
- Investor · Mission Viejo, CA · Member since 2012 · 627 posts · 204 votes13y
Ryan, glad to help. If the materials are in good condition and do not need to be disturbed to do other work, managing them in place is the least expensive approach. Only if there is very little does it make sense to remove LBP or A just to get rid of it.
Testing that building for A&L should cost something like $2,750, and you should get a nice formal report.
The age is good news in away for asbestos, as it was not used in many of the original materials 100 years ago. It may have come in during remodel and repair work. The most common materials which contain asbestos are drywall joint compound, sheet vinyl flooring (not linoleum), vinyl floor tile, floor tile, mirror, and other mastics, window putty, pipe, tank, and boiler insulation, HVAC duct insulation, asbestos-cement flues, asbestos-cement shingles (roof or wall), acoustic ceiling texture, stucco, roofing materials, and even sound insulation on steel sink bottoms. It is rarely found in interior gypsum plaster.
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