36 unit apartment complex ADVICE!!!!

Joshua Hanning

Saint Petersburg, FL · Member since 2017 · 8 posts · 13 votes

8y

The primary question, at first glance, is whether the loss of $750k would ruin you if things did in fact go south. Do you have access to the funds to throw into a money pit should one reveal itself. Use the BP Calculators to double-check your numbers, but It sounds like you have some wiggle room. Sounds like your contractor is talking about Section 8 housing. That comes with its own set of problems/conditions in exchange for the guaranteed rent. I would suggest searching some of the other BP forums for those caviats if you are unsure. Remember that your Contractor is the expert on the rehab, but may just be regurgitating something he heard once about a government program. Take his comments (and mine) with a grain of salt.

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

@Jordan Moorhead trying to figure out exactly how we'd get the funds but we do have a management company we'd go with!

Steven Kleppin

Rental Property Investor · Manama, Bahrain · Member since 2015 · 96 posts · 68 votes

8y

The govt will pay some low-income housing. Section 8 is usually the means, and they usually pay only a portion of the overall rent. HOWEVER, they will still usually base that off of the local rent rate. So even with govt subsidies, the amount you get per door should be whatever the market rate is. So do your research to see if the contractor's quote checks out. Contact property managers, call up other apartments in the area to see what they are charging, etc.

Also, since this is your first time working with the contractor... whom the seller put you in contact with... I would suggest getting a second opinion. And get referrals from folks who aren't the seller.

IF that all checks out, sounds like you've got a fun project on your hands that will make you some money on the value add ( i don't have enough info to determine cashflow, so work that as well).

Let us know how it turns out.

Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

8y

@Paul Fagot, what are its current returns? How many vacant? How much do the current tenants pay per month? [There seems a lot of "we believe" and "we say" comments in there that have not been verified and researched as well as they need to be. eg. An extra acre?] My 2c...

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

The Apartment complex is vacant right now.. its eligible for section 8 here in red bluff.. Rent for 1 bedrooms $500 and 2 bedrooms $700-750 if you were to make some units 3 bedroom around $900-1000. We're planning on getting a second contractor out to check it out and get another estimate. Returns $20-24k a month. @Brent Coombs thats what we were able to find out

Robert Schumacher

Investor · Campbell, CA · Member since 2016 · 76 posts · 91 votes

8y

@Paul Fagot Why is the place completely empty? There is a homeless issue up there. Are any units occupied by the homeless who have created residency, forcing evictions. I assume your thinking about an all cash purchase. My experience has showed me that many lenders won’t loan on a property that hasn’t been stabilized. (If you find some that does, I’m always looking). I’m still transitioning a similar project. Best of Luck 👍🏻

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

The property needs work and the owners don't want to deal with it anymore. There hasn't been anything with the homeless at all.

Tom GimerBusiness Member

DMV · Member since 2017 · 3k+ posts · 3k+ votes

8y

The extra acreage is the most interesting part of this. It could make an otherwise very costly and risky deal worth pursuing.

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Dash Siva

Investor · San ramon, CA · Member since 2011 · 145 posts · 33 votes

8y

Hi Paul -

Great work taking action and looking at this potential deal. You're absolutely on the right track - there are quite a few options such as wholesaling it, taking it down yourself, partnering with others.

Looking at the deal, what input have lenders given you on the deal in terms of financing? Speaking from experience, there are lenders out there that could help with purchase and rehab even on vacant commercial deals.

I'd also look at doing a market analysis to get a full understanding of rents in the area to help with your overall due diligence.

Also get additional documentation from the owners on financials, current expenses, contracts. Also go back to when the property was stable (if it ever was).

How is the additional land zoned? What are the opportunities?

Feel free to PM me - happy to always talk real estate.

Robert C.

Investor · San Francisco, CA · Member since 2016 · 338 posts · 444 votes

8y

@Paul Fagot, Just one tip. Don't underestimate how long it's going to take you to fill 36 vacant units - section 8 or no. Make sure you can handle the expenses for a few years with no cashflow.

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

Will do @Dash Siva

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

@Dash Siva partnering up like as in with a lender? or an Investor with the capital for the property?

Omar Khan

Rental Property Investor · Dallas, TX · Member since 2017 · 1k+ posts · 1k+ votes

8y

@Paul Fagot You've received excellent advice on this post. I would venture to say it all boils down to: how much capital you are willing to put into this deal and how long can you withstand no or negative cash flows. Everything else emanates from these two questions (IMO).

On the face of it, your deal looks good. But you will to get more concrete #s from property managers, brokers, lenders and other local sources. I would also advise that you get multiple quotes from contractors which includes the entire scope of the project including any potential overruns that can occur.

If you can provide more #s around this deal, we can all chime in and help you out.

Best of luck!

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

@Omar Khan i believe we will just be wholesaling this one..

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

ADVICE! So for financing please anyone tell me or give advice on this thought. We have a private money lender and our thought is to get a loan for this property 100% (purchase and rehab loan) but instead of paying interest and a downpayment since we don't have the capital right now to be comfortable with that. The idea is to get the loan for the property but instead of paying interest and the down they would receive (example) 25% equity in the property and the money back from the loan they provided us. has anyone ever done something like this or have heard anything like this for a income property?

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

!?

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

ADVICE! So for financing please anyone tell me or give advice on this thought. We have a private money lender and our thought is to get a loan for this property 100% (purchase and rehab loan) but instead of paying interest and a downpayment since we don't have the capital right now to be comfortable with that. The idea is to get the loan for the property but instead of paying interest and the down they would receive (example) 25% equity in the property and the money back from the loan they provided us. has anyone ever done something like this or have heard anything like this for a income property?

Paul Choi

Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes

8y

@Paul Fagot

I haven't heard of that but sounds like a great way to get a deal done....creative financing.

To play out the scenario, they put in $1mil +$500k for rehab to acquire the property for 25% equity stake. You would probably have to form a LLC (or similar) and give them 1/4 stake. You said that they will get their money back...by selling the property once it's renovated and property stabilized and sold/refi? What's their upside? ie. 25% of equity created and cashed out by refi or when sold?

or Will they collect 25% of monthly/quarterly/annual net profits then if/when it's sold, they will collect their principle on the exit?

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

By getting their money back it'd be monthly if we plan on holding the property. And yes they'd collect 25% monthly annually profits as well. And have 25% in equity if we ever sold it. @Paul Choi

Paul Choi

Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes

8y

@Paul Fagot

Sounds like a good way to secure the deal. Basically a passive investor. I've done something similar for a SFH flip. Investor put a portion of the funds to secure and rehab the property. I run the project as well as have my own money in the deal. No interest payments or anything while the project is in progress. Investor get a % share of the net profits when the flip is sold.

I'm sure you know this already but have an attorney write out all the terms. You call all the shots and have control of the project. You don't want a back seat driver. minimum years that the investor needs to hold the note. You have first right to sell or refi the property to buy out the investor, which I think you should definitely put in your plan. His cash on cash ROI may not be great.

On the flip side, write out terms if the deal goes bad, if negative for months as the property stabilizes, returns are not up to expectations for the investor, etc. lots to cover and make sure you do in the contract!

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

8y

@Paul Fagot It sounds like you need a partner (however temporary) for the deal. Why? It doesn't sound like you can concretely know what the total investment is going to be at the moment. That ambiguity aside, let's run through some numbers...because quick math says I'm probably missing a few things...

So if I'm the lender putting up 100% of the money it's going to be, what, $750K out of my pocket. While it sits in this deal it's not earning me (the lender) any money. In fact, I'm probably paying more out for utilities, insurance, property taxes, etc. For some period of time it's just ongoing outgoing checks. Anything that needs $250K-$300K of work is going to take more than a little bit of time to complete. And there's no way you're dropping $300K into a property and not have it involve works that needs inspections, sign-offs, etc.

So let's round up and the lender is out $800K. That $800K is secured by a property with ARV between $900K and $1.1M. Let's call it $1M. You put it on the market and sell it for $1M. Take away closing costs, real estate commissions, etc. (roughly 10%) and we have $910K left. The loan is repaid to the investor ($800K) and the investor gets 25% of the $110K profit? That's $27.5K for risk, keeping money tied up, etc. and it's under 3%. That doesn't work. So what if the investor gets 25% of the $910K that's left post-sale? That's $227.5K but the 75% left-over to repay the loan (to the investor) is $682.5K. So that doesn't work either. So what if you refinance in a 75/25 LTV loan (because you now have a rehabbed, full, etc. property) based on your ARV of $1M? Well, that's $750K so you don't have enough to repay the HML the principal.

If you like the deal (who wouldn't like $30K in gross rents) you need someone who doesn't want their money back in the foreseeable future.

OP

Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes

8y

That's a little of good info! I appreciate that! @Andrew Johnson

Paul Choi

Rental Property Investor · San Ramon, CA · Member since 2017 · 350 posts · 611 votes

8y

@Andrew Johnson

excellent points! Which is why I mentioned that the investor's cash on cash returns doesn't sound too great. I'd imagine an investor who fronts 100% of the money want's a minimum of 50% share.

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

8y

@Paul Choi What would concern me with @Paul Fagots numbers is that i just don't think they can support flipping the deal if only one party has money into it. Even at a 50/50 deal it's tieing up $800K for a $55K return. It's a 6.9% return for 6 months, no bad, but the other party having no skin in the game mean you need an outsized return as well as being on the hook for unknown expenses. All of a sudden that 6.9% return doesn't look that great anymore. And the last thing that someone financing a deal is going to want to do is finish out a $300K rehab. Dumping a project of this size onto the open market for someone else to do isn't going to yield awesome offers, just a heck of a lot of "what happened" questions.

My opinion, and what do I know, is that you need a partner who *believes* in the gross rent potential of $30K per month. And if your contractor *truly* believes that it will be a $30K gross rent building you've just found your new partner or your link to partners that have funding for something like this. Seriously, if you could show me a $1MM property that's just been fully rehabbed with a gross rent potential of $360K per year? I'd have to ask what the catch is on a deal like that. Even at a 60% expense, insurance, etc. number I'm netting $144K. My debt service on an 75/25 loan yields a $750K loan balance at 5% with 25 year amortization costing me $4,384 per month or $53K per year. So I net $91K per year on a $250K down payment (as an investor buying this post-rehab) for a 36% cash-on-cash return. If I bump the cost of vacancy, PM, insurance, etc. from 60% to 70% I still net 55K per year for a 22% cash-on-cash return on a fully rehabbed property.

So I would *guess* that this whole $30K in gross rents is just pie-in-sky. If it's not, well then, you're either in a warzone or you've massively underestimated your ARV. The big thing here is that you apparently have a deal that's potentially horrible to flip but an awesome buy-and-hold. You usually don't see both sides coexisting (at such extremes) on the same property.

I'd guess one of these numbers is WAY off: $30K gross rents post-rehab, $800K all-in to get up and running, ARV of $1MM best-guess.