Financing on 20 units - Posted by J.D. Stewart

Real Estate Investing Real Estate Financing
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Posted by John Corey on May 03, 2006 at 02:31:38:

JD,

I would not look to buy the units at this time. Get an option and take over the management. No cash to the present owner as you will be putting the cash into the units to turn the property around.

Agree a tiny price for the option or one that is a function of the future NOI. That way you are not paying for the property base don the old cash flows but the new reality. It matters little what the seller wants when there is such a major vacancy problem.

If the properties have separate titles then you can do a rolling deal where you move from one property to another and the option moves also (or a series of options). Do not commit to buying the whole thing until you know what the cash flow is really going to be.

The seller has the problem. Be slow to step into his shoes. Let the seller continue to own the problem so there is minimal risk to you while the market is unsettled.

John Corey

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Financing on 20 units - Posted by J.D. Stewart

Posted by J.D. Stewart on May 02, 2006 at 15:00:19:

Our little town (25K) had one of its major employers leave town a couple months ago, leaving 1400 people without jobs. Since it was a meat packing plant, most of those jobs were low-paying. As a result, those people left town for greener pastures and the apartment buildings that catered to them are between 75% & 90% vacant. Talk about hurting!

However, as a RE investor, I smell bargains. 98 of those units went up for auction this last weekend (same owner), and none of the bids got to the reserve. On a package of five 4-plexes, there was only one other bidder besides me. High bid was $13,500/unit ($270K). Seller later told me he’d take $15K/unit, so we’re close.

There are 15 2BR, and 5 1BR units, with only 5 rented right now. Of the rest, 1 is ready to move in now. 5 just need cleaning and maybe minor touch-up paint. 1 is totally trashed and needs everything. 3 need carpet, linoleum and paint, and the last 3 need the same but are in the process of rehabbing (everything torn out). I’m estimating $30K by the time the whole project is done. The current owner has put in around $11K/unit during the last couple of years, including new roofs, outside paint, landscaping and a new connecting street for access from 2 streets. Bones are good. Just needs the insides gone through.

Rents are between $325 and $395, about right where they should be. Figuring renting the singles for $315, the lower 2 BRs for $375 and the uppers for $385, total rents would be $7300/month. It’ll cash flow with 50% occupancy and 100% financing. That flow can fix up the rest of the units. By the time it gets up to 90%, it should be making $30K+/year. ARV would double by then.

I have the money to support the project for a few months and start rehabbing the units, but that doesn’t leave me anything for a down. This is a bigger project than what I’m used to, but I do own some commercial properties and SFRs. I have a construction background and can do the rehabbing along with my rentals handyman. Last I checked, my high credit score was 871, so I’m good there. :>) One of my commercial properties is almost paid off, so I can pledge that as well.

This whole project depends on the ability to fill the units. I would market to a better clientele, since they’d be in better shape than before. With below-market rents and possibly some incentives, I should be able to attact quality tenants from other properties.

Any commercial lenders interested?

J.D. Stewart