Buffalo West Side 3/3 duplex rehab with expansion potential
Investment Info:
Small multi-family (2-4 units) buy & hold investment.
Purchase price: $125
Cash invested: $31,000
Still trying to figure out if I should wrap rehab into "Purchase Price" and figure 1031 money as "Cash Invested". Oh well. We bought this property as part of another 1031 Exchange, and it came down to the deadline. I was having a horrible time spending the remaining proceeds from a 1031 (roughly $31K) during the hot buying season in Buffalo. Looked at tons of properties, but none met our metrics. This property is across the street from one of our other duplexes, and while doing the rehab on that one, I continually noticed the house across the street was sitting vacant, under renovation, with tons of potential. I happened to see the owner one day and asked if he'd be interested in selling it to me. He had never considered selling as he was renovating it for his own family: they would live upstairs and rent the downstairs. He already did all the hard stuff: demo, new roof, new electric and plumbing, new custom windows, drywall. All that was left was to finish the spaces with trim, flooring, kitchens and baths. Previous owner also set up the HVAC for the attic, so that the owner-occupied could have a two-story apartment on top of a rental. While I'm not using the attic (illegal as a rental) this adds value for when I potentially sell to an owner-occupied. Also, the outside was hideous: red asphalt shingle siding. There is also a rear house on the lot that was beyond disrepair.
I undertook my due diligence and put together the scope, also finding out that we could demo the rear house and rebuild a MULTI-FAMILY in the future -- it was already zoned for multi!! This area is heating up big time, with large development projects around the corner yielding rents of $1500+. My projected rents for the two 3-bedroom units was $1100. I ended up with $1100 and $1200, respectively. Keep in mind this is Buffalo. So, while the total I spent on this property with purchase and rehab was more than I'd prefer, it offers me this:
1) fulfilled my 1031 Exchange obligation at the last minute
2) potential to add units
3) quickly appreciating neighborhood
4) in-demand rentals (both units rented before they were 100% done)
5) $500/mo cash flow after expenses
Honestly, we're about $6,000 out of pocket on this project if you consider that the 1031 money was never really "my" cash to begin with. It's not the return I would normally demand, but I think you'll agree the above bullet points make up for that. We spent $125K on the purchase, $75K to complete units, paint the house, build a front porch (not pictured), and another $16K on demolition of the rear (asbestos contamination sucks). ARV nearly a year ago was projected as $225K but based on the market comps I've seen, we're easily pushing $275K now. Remember that it's zoned that more units can be built!
The other great thing about this project was that it "legitimized" me in the eyes of some other investors and contractors. While it was not our first project, I walked a few people through this one who were impressed with the rehab, rents, and my screening process. I just secured a private lender at phenomenal terms in part to showing them this project.
What made you interested in investing in this type of deal?
Honestly, this was right across the street from another rehab we were doing. Convenience was definitely a factor. I had a 1031 that the clock was ticking on....loudly.
How did you find this deal and how did you negotiate it?
I literally walked across the street and asked the owner if he would be willing to sell it. He told me his purchase price and cash invested so far and we went back and forth for about two weeks. It took him a while to finally sign as it was originally meant to be for his family.
How did you finance this deal?
Commercial rehab loan through a local lender. They finance 80% of the purchase and the full rehab, up to 80% LTV. Due to my excellent relationship with them up to that point, they agreed to go 85% so I could pull more money out. I'm not worried about being over-leveraged as the appreciation of the neighborhood continues to skyrocket.
How did you add value to the deal?
Rehab. Another win for this project was discovering original clapboard in great shape under the asphalt siding. We had originally planned to vinyl-side the house, but upon this discovery, I consulted with several realtors about the value of painted clapboard vs. vinyl siding in this neighborhood. The consensus was that paint added up to $10K in value, and my contractor was willing to do either for the same cost.
What was the outcome?
Both units rented at and above projected rents, prior to even finishing the entire project.
Lessons learned? Challenges?
Identify replacement properties BEFORE selling if you are doing a 1031!! Honestly, I already had another one identified and under contract, but had to spend the remaining funds. This was a good place to park the money for a while, and benefit from some cash flow and appreciation.
