The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: bisimpson on June 28, 2018, 01:48:35 PM
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My mother owns a building in what appears to be a pretty LCOL part of TN. I call it post-McDonalds/pre-Starbucks. She has about $200k in the building, I think she would settle for $185k, but hasn't gotten an offer better than $145. The building has been on the market for probably over two years. The building is probably the largest in the area葉wo floors, 6,000 sqft total. She has tried looking for a commercial lease, but I don't think any business really needs that much space.
Lately she has discussed giving it to me and my sisters (I have three older sisters擁t was like having four mothers). We have thought about converting it to townhomes (five 1,200sqft units) and renting them, or some type of mixed-use space. Right now its zoned for commercial, but I think the city would be happy to see it rezoned.
Without having talked to a builder, we anticipate that we would need to spend about $100k to convert the units. We think we could probably generate about $35,000 a year once the mortgage is paid, probably about $15,000 while we have a mortgage.
Right now, as I understand it, there is no residential rental inventory. So we think that might be a real option. If we go with a mixed-use space, we're considering some type of "we work" space.
Another issue, if the building comes to us, none of us are willing to put our own money into the project. We would be willing to get a loan to cover any costs it would take to convert it. We are assuming that the building would cover the loan.
In short, it looks like my mom could sell it for a considerable loss, or, if she hands it off, we would need to invest some money for it to generate cashflow.
I'm looking for any feedback/facepunch you might have. Are we thinking about the space well? Am I missing anything? Thanks in advance.
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When you say you would need to invest $100k in the units - do you mean per unit times six or do you picture it costing $100k to build out six townhomes? Because I would guess $100k per unit would be high but more realistic than $100k total. Six kitchens, six to twelve bathrooms, bedrooms, and all the other rooms and finishes that go with it would add up fast.
Everything you do in a property this size is expensive. How is the roof? How is the HVAC? All the hvac would need replaced for a townhome conversion.
Free real estate is never a bad deal, but be realistic about what it would take both money-wise, time-wise, and expertise-wise to make something income producing out of the property. Sometimes even getting a contractor to bid on a job is like pulling teeth. You would likely have to invest thousands into architectural and engineering plans just to get a bid package together to where a reputable builder would bid on it.
This is not intended to discourage you, but to try to help you be realistic about it. Having the property is just the beginning of the job!
We have a 65k square foot commercial building in a very good market and have managed to keep it full and to fund all improvements through cashflow. But from that cashflow we have literally spent millions of dollars over the last decade to keep the building in good repair and to keep it relevant and up to date to attract and retain quality tenants. Residential has less frequent "gut and remodel" requirements compared to commercial, so in that way the conversion idea has advantages. But you'll be front-loading a lot of costs there.
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@theoverlook 葉hanks for the reply.
I'm thinking $100k overall all 6 units葉hough that might be a little low. We still need to get a bid. We're learning that doing something more than 3 units will create some red tape. So maybe 3 apartments upstairs and a business downstairs.
The HVAC is fine, but we're looking at a $9-$10k roof sometime in the next two years.
Earlier this week, a business approached us about leasing the entire space. The rent income would be less than what we would generate from apartments, but there would be less upfront cost. This might allow us to cashflow the apartments if it came to that down the road.
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I think the $100k is way to low for this project. Each apartment is going to need a firewall between most likely. The HVAC may be fine but if you are turning one space into three you will have to redo the duct work and have to get a compressor for each unit so they can be operated separately. You will need new plumbing for three kitchens and bathrooms. Then you are going to build the interior walls and cabinets. You are probably looking at $200,000 - $300,000. With that much work you are probably going to have to bring the building up to code if there was any previous issues that were grandfathered in.
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Converting a commercial building to residential units will cost at least $100 per SF, so $600,000 + your $185,000 purchase price. Do the the numbers work now?
I'm thinking it is not all that great of a piece of real estate if it's been sitting on the market for two years with no takers at that low of a price. I'd let your mom sell it for whatever she can get and cut your losses.
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Unfortunately $100,000 for six units just isn't going to happen. Especially if you're involving a builder. I think Fishindude is about right at $100/sf. We will spend $25/sf just to do a basic "refresh" of cosmetics in a commercial space, and that's with us being the general contractor and handling a lot of the demo, metal framing, drywall hanging, punch-out, etc. Your current HVAC is completely inadequate for residential units. Each residential unit will need its own HVAC.
I think it could be a good property if you found a commercial tenant. But look into the carrying costs - what does it cost for you to hold it, empty, but stabilized? Can you guys afford that without stress?
Making the first floor one commercial space and leasing it out then cashflowing the apartments is a good idea. Just be prepared for it to cost a lot more than your expect and be patient. We've taken decades to get our building to where it is and there are still things we plan to do but keep on the schedule for "later." We just did a new chiller installation that was $330k and we managed to pay for it all from cashflow. It can be done, you just can't expect it to take six months and be easy or cheap!
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Sell it for $145k. That is what it is worth, how much was paid for it has nothing to do with it, if that's the only offer in 2 years thats the market price.
Invest the $145k.
You are now ahead $145k rather than being in debt for the ungodly amount( not $100k for sure, way more) it will take to rehab property and waaayyy less stress.
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@theoverlook 葉hanks for the reply.
Earlier this week, a business approached us about leasing the entire space. The rent income would be less than what we would generate from apartments, but there would be less upfront cost. This might allow us to cashflow the apartments if it came to that down the road.
If this works out that will be good.
If it doesn't go through I'd forget about the apartment conversion, because as has been mentioned it will cost a lot. Instead of apartments, why not split it up into smaller business spaces? That would be a lot less expensive & simpler to do. Look around a see what smaller business spaces are renting for and try to determine if there is demand for them. If there's a street frontage side it could work for retail, and the rear might work as warehouse space or light industrial. Maybe the upstairs would work for office spaces.
By dividing it up you can appeal to smaller businesses and charge more per sq ft. You won't have to worry as much about being vacant either.
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Thanks for all the feedback用articularly about the cost of conversion. I really appreciate it. Part of the issue is that I don't have any ownership, but at some point it will come to me, so the decisions impact me.
We were able to get it leased, so it's generating some income. And this tables any discussion about converting it to residential.
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What do you mean that your mother has $200k into it? Why did she buy this place?
I'd agree that your estimate to make housing units is way, way, way low.
You say that there's a renter ready to rent? Why is your mother not jumping on that opportunity to at least get something out of this place.