When I first started out investing in Apartment Buildings I noticed that some of the other buildings in the neighborhood were being rehabbed. After I had majority of all the units rented in my second apartment building, my building manager suggested I rehab one of my apartments and see what happened. I thought why not and I would pay for the rehab from the income from my job.
I figured that the apartment in question could be improved by trading some of the space in the very large kitchen for a bedroom which could handle a bed and a dresser, that a heating system better than an ancient space heater would be good, and that something other than a concrete floor which had water seepage whenever it rained was needed.
Through my property manager, I hired a general contractor to do the work. Six months and $10,000 later, the rehab was complete. I raised the rent from $375 to $550 and brought in some good tenants. My cash flow improved almost by 50%.
With the success of this first rehab, the idea crossed my mind to do the other three units. I did not, however, have the money and wasn't excited about funding this from my salary again. My wife was getting tired of hearing that money was being diverted from my paycheck to the rehab.
At that time interest rates were falling. An adjustable mortgage at 12% was high. I decided to refinance the property and hoped that the appraisal would come back high enough so that I could pull some money out for subsequent rehabs of the other units.
I shopped the mortgage market and selected Avondale Federal, who offered a loan that was like a checking account. You could write checks as needed, so long as the amount owed never exceeded 80% of the appraised value. I only had to pay the interest (the prime rate) that was due.
I applied for the loan and made an appointment with the appraiser. When I went to the property with the appraiser, I pointed out all the nice features of the remodeled unit. He did not appear very impressed with the old space heaters or sinkless bathrooms in the other units. I was hoping the appraisal would come in between $100,000 and $110,000 so I'd have some rehab funds.
My First Apartment Rehab Changed My Life
The lending officer called me a few weeks later and told me the appraisal had come back and the bank was ready to close. I meekly asked what the appraiser had set as the property's value. He responded, “$237,000”. I asked if he had the right appraisal, and he verified that the address was indeed that of my building.
I was in total shock. Things like that didn't happen to me. I couldn't reconcile this with my self-image. I felt like I could hardly work. I couldn't even talk. I went home and asked my wife to leave me alone for a while. Then I cried for about two hours. I had finally done something right (besides marrying my wife).
The building I had feared was a lemon, wasn't. My view of myself was changing. My first apartment investment was working out well and cash flowing, the second building I purchased had changed to $160,000 of equity, I was happily married, and I even had a job I liked. The equity in the building ($237,000 appraisal value less $77,000 owed equaled $160,000) was incomprehensible to me. I had never had that kind of money or net worth.
I continued with the rehab and finished the other three units. I got the building re-appraised. This time the appraisal came in at over $300,000. Since I owed around $110,000, I had the capability to write a good check for $100,000. The words of Seller who I bought my first apartment building from echoed in my mind, “I wish I had bought more buildings.”
You know what that means – It was time to move ahead and use my equity to buy more buildings if I was to become a Apartment Mini-Mogul.