I’ve got a 4plex on the hook for $330k (CAD) – which at $82.5k/door is an excellent purchase price in my market. I told a business partner about the deal and he called it “2018 pricing”..
For the record, when I close on this I’ll have 24 units (nearly all of which I have renovated extensively), so my question doesn’t come from inexperience.
Now the problem is something like this..
The building has a ton of deferred maintenance. So, it will require, at a very minimum; new roof ($~15k), new windows (~$18k), full exterior paint job (~$15-18k), a bit of foundation repair ($5k), and some miscellaneous interior and exterior repairs (call it $10-15k). So, on the high end, you’re at around $70k just to clean up deferred maintenance… And you still have dated and dirty apartments with low rents that won’t attract good tenants.
So some amount of unit renovation has to take place. Let’s call it 3 different options – low/mid/high spend
Low Spend Model (CapEx + ~$30k per unit)
Complete all necessary capex / deferred maintenance, but spend minimum required to update units – $30k ish, new kitchen, bath, finish materials, new flooring, paint etc. – all superficial. No major electrical, plumbing or heating upgrades.
This model doesn’t really work with this building for a few reasons. For one, the oil heating bill is outlandish, so it’s screaming for an efficiency upgrade (in my neck of the woods we used mini splits / “heat pumps” + supplementary electric wall heaters). Additionally, the units have enough issues beyond the cosmetic, that upgrading the finish materials alone will likely produce a cheap result.
Mid Spend Model (CapEx + ~$45k per unit)
In this model, you do all of the above, plus the utility upgrades, and a bit more attention gets paid to the overall presentation of the units. Wall panelling gets replaced with drywall, maybe the odd wall gets moved to improve layout, etc. Overall, more surface area gets attention.
This model may “work”, but in the end, I probably have ~$600k into a building that’s not worth much more than $600k, and have spent a lot of time on it.
High Spend Model (CapEx + ~$65k per unit)
You all may choke to think of spending $65k per unit in isolation, but I’ve had very successful projects that landed in this zone or higher (only tends to work with smaller multis in my market).
In this model, you go for a “high end” result. This doesn’t necessarily mean quartz countertops, but it does mean ensuring the overall presentation is very good and that you attract higher end tenants. Every surface in the unit is considered, layouts may be reconfigured, kitchens may be a step up from Ikea.. You essentially do what’s necessary to make it a great space and a great offering.
I actually like this model, but I can’t find any comps in my area to support >$800k for a 4plex. I’d likely have over $700k into the place – and the appraisal might come in at $770k or something. It may also outshine its’ station in the neighbourhood – as it’s in a part of town that is still not as clean, but totally on the path of progress. In 20 years it will likely be in a sought after part of town.
FWIW I did this to a triplex in a nice, gentrifying downtown neighbourhood starting in 2020 – bought for $287k and put about 250k into it, so 537k cost basis and appraised for $667k at the time. Very nice building, everyone who’s ever seen it loves it.
Final thoughts..
At the end of the day, I’m in this to build wealth, have buildings that service debt and produce cash. If I can achieve those goals and also pull most of my capital out on refi, I’m not too beaten up if my initial equity spread isn’t spectacular (although that would be ideal). I’m mostly concerned that none of the above models result in getting most of my money back on refi.
As a final note: I only like being in this business when I have clean apartments and good tenants. The “as is” model isn’t in consideration – there’s no greater chore in my imagination.
Has anyone here been faced with a deal that’s an excellent purchase price, but the renovation models (low-mid-high) don’t pencil out?
byu/dcutcliffe inrealestateinvesting
Posted by dcutcliffe
1 Comment
Man, this is giving me flashbacks to my cousin’s nightmare renovation in QC few years back. He went with something between your mid and high spend model and basically broke even after refi, but the stress nearly killed him.
Your math looks pretty solid though – that $82.5k/door is definitely tasty pricing even with all the work needed. I’m thinking the mid spend might be your sweet spot here, especially since you mentioned the neighborhood is still “on the path of progress.” Going full high-end might just be putting lipstick on a pig if the area isn’t quite there yet.
One thing that caught my attention – you said this building has oil heating? Dude, those mini splits will probably pay for themselves in like 2-3 years with current energy costs. My brother-in-law switched his duplex to heat pumps last year and his tenants actually thanked him because their bills dropped so much. Plus you can market it as “energy efficient” which seems to attract better quality renters these days.
Maybe consider doing one unit at high spend level as a test case? See what rent you can actually pull and how the market responds, then decide on the other three based on real data instead of guessing at comps.