Rehab with Cash Flow – Multifamily

I want to talk about rehabbing an apartment community out of cash flow. Don’t do it. And I want to explain why and elaborate a little bit because I’ve seen this scenario happen over and over again, where somebody buys a property and they assume that the monthly cash flow is going to pay for the renovations on the property. So the cash flow is the money left over after you take all your entrepreneur and other income, you pay your mortgage, you pay your staff, all your expenses, everything, and then you’re left over with some cash flow every month. Well, sometimes a business owner will go into a project and assume that the cash flow’s going to be enough to renovate the property over time, and that’s really not the way that people should be thinking about it. Simple concept, but I’ve seen it enough times and I’ve seen it lead to disaster for people enough times to talk about it here. So ideally what you do is you come into a project, you get the property inspected, every single unit, all the systems, mechanical, electrical, foundation, etc., and then you build a budget up front, let’s say it’s a million dollar renovation budget for a project, and then you have that money up front day one that you can spend. Now, there are two ways to get that money. One is just to raise it in the project and have it, and we’ve done it that way. Another way is to partner with the bank and set something up. This could be a bridge loan or a construction loan, or maybe a traditional lender will include some renovation funds. They might include, if it’s a million dollar renovation, they might include, let’s say, $700,000 or $800,000 for the renovation, and they’ll hold onto that in their escrow and then you do draws on that. But whether the bank’s holding it, or whether you’ve got it cash, you might to want make sure day one on our project that you’re earmarked to go in and do all the renovations. And then you also budget a line item, you know, I’ve seen about $750 per unit per year for repairs. Now some property’s higher, some property’s lower, depends on the market, cost of labor, etc., but you also want to put in the budget that repair and maintenance budget just for ongoing things, but you want to have your capital improvements budget all set up up front, otherwise you run into trouble and that’s something I’ve seen quite a number of times. So, don’t rehab out of cash flow. Take all the rehab money and get it up front, whether it’s cash or whether you’re partnering with the bank on it, have it all up front and that’s a good start on a multi-family project. Thank you.