Net operating Income (NOI) projections for value added real estate loans are similar to other real estate loans, except that because of unusually high expenditures for improvements to a property, the cash flow typically will experience significant change.  The following basic line item proforma illustrates this type of cash flow change.

Depending on the extent of the required remodeling the vacancy rate may (or may not) vary significantly from the norm.  In certain cases it may be more efficient to empty the entire building to maximize speed and efficiency of the remodeling.  This creates a temporary 100% vacancy rate.  In other situations the best option may be to remodel a few units at a time while keeping the rest rented.  Even this option will create a significantly higher than normal vacancy rate.

Most multi-family investors doing significant remodeling work in hopes of creating higher rents and lower vacancies will capitalize instead of expense these capital improvements. In some cases the multi-family investor may already own the property which may impact their choice as to how to treat the remodeling costs.  In other cases, the investor will be purchasing the property for renovation and will need to include in their budget funds sufficient to carry the property during the renovation period of low cash flow.

In today’s overheated multi-family investment climate, the purchase and renovation of underperforming properties may offer one of the best ways to obtain a decent return on investment.  The trick is to be able to find a lender that is sophisticated enough to understand the process and provide the funds.  Some banks are willing to consider this type of value added real estate loan but many others are not comfortable lending in this type of situation.

Private Money Lenders

Many multi-family investors are recognizing the utility of working with private money lenders (often called hard money lenders or bridge lenders) to acquire, remodel, and carry a property until the cash flow stabilizes at an amount sufficient to allow the property to qualify for a long term low rate institutional loan.

[google_authorship], because of his more than 40 years of experience in funding hard money loans, is considered an authority on hard money or bridge financing.  He frequently speaks at meetings and conferences and writes articles on these subjects.