I'm a newbie trying to make the right plan on my recent purchase. First off, let me introduce myself by saying that my partner and I bought our first rental four years ago in Alexandria, VA. I already had a house so we live in the woodbridge, va house for a number of years. We had been looking another property to buy an we didn't really have a plan in mind at first but once we started looking in DC, we can across this property in NE DC in the Trinidad neighborhood that we closed about two weeks ago. The plan is to move to this property as it will be our primary home and rent the Woodbridge house.
My question is regarding the plans on the DC house. The DC house is very livable but it has never been renovated. We bought the property for 600K. I had two options in mind.
Option 1: To Hold
Convert the basement to a basement apartment and rent it out and we would still live in the house. Converting the basement to a basement apartment (2bed,2 bath) my estimate is of 100K. It needs underpinning + everything else to convert it. Is my estimate too low?
If it really costs 100K then I could rent the basement for $1800 and I would recoup the money in about 4.6 years.
With this option, we hold the property and renovate the upstairs slowly and live there. The neighborhood is up and coming and trending to go up and years.
Option 2: To Sell
The property has enough land to pull permits to be converted into a 3 condo conversation. The house beside us is almost done with the construction of their 3 condo conversation.
The option here is to pull the permits and underpin, so about 95K (50K for permits + 45 for underpinning) and sell the house to an investor with experience in year 2. We would make 87K if we sell it in two years. This number is taking into account that we would sell the property for 900K in year 2.
What are your thoughts on this?
No ones is paying $900k for a property in Trinidad that still needs a full gut renovation on every floor other than the basement. 3 level aquisition costs of a Wardman/Petworth style rowhouse in Petworth is about $500-$550k
@Andrea Delgado @Russell Brazil is 100% correct on selling this property at 900K in year 2. If I'm reading into the missing details, while you mention rehabbing the property while you live it, you're post doesn't include the cost of the rehab that will get your property value up to the 900K.
You purchased for - 600K
Basement rehab - 100K minimum (plan for more)
Upgrade whole house at what level of finishes? Someone buying a 900K property will want some nice finishes - $$$$ (what's this number)
I also think the permits and conversion cost is missing from your post. I would also make sure you include the cost of capital in you IRR.
I have two questions:
1) What does your IRR really show if you exit at the end of year 2 when you're including all of your missing cost?
2) What does your IRR show if you held the property through stabilization of all changes, lets say if you held until year 5, 10, 15, etc..
Russel from what i saw and from what our realtor (he is an investor as well) said is that the 500-550K are for the row houses that can only be converted to two condo's due to the limited square footage. This property can be converted into a three condo conversation. I'm also not referring to sell it now for 900K but in two years time.
What is your opinion on the basement apartment. Do you think holding the property a better option ?
Just the underpinning (depending on access) will run you 40-80K. Its not a simple process, highly regulated, and lots and lots of demand recently.
@Andrea Delgado The other thing I forgot to ask was are you going to meter the basement separate from the main house, If so in addition to the underpinning as Tarique mentioned you'll go way past your current estimate.
I have several properties in DC, only two in NE (Brentwood neighborhood) but the price you're targeting is more in-line with my NW properties, Are you seeing Trinidad to rise at the same pace as the last two years even though rates are rising? I'm starting to see some slowdown in DC as rates are starting to affect buying power and presenting pressure on prices.
The estimates are low. Permits need plans so you need to include the architect cost which is about 10% to 15% of the cost of the project. Zone variances if you plan to add a level or extend the back. An experienced investor does not need a property delivered with permits, they may have a different idea for the property. What is the condition of the basement? Can you airbnb as is? Are the basement ceilings 7ft. You mentioned underpinning. You either do very little or go all in. You will get more than 900 if you convert and sell 3 condos. A legal basement has it own set of requirements and the cost will add up. It may be easier to go the airbnb route.
@Shadonna N. Thanks for the answer. The besament is about 6 ft unfinish basement. It only serves for storing items. I might go the airbnb route for a room in the upstairs. I'm hesitant to convert the condos myself given i don't have enough experience.
@Ray Johnson I'm starting to see some slow down as well or properties that were listed too high are getting their prices dropped. I think i'm probably low on my estimate like you are saying.
I might try the airbnb as Shadonna suggested to see how that goes and to re-think about my plan.
I would hold. Long-term you cannot go wrong in Washington DC. I have lived here my entire life and seen all the transformation that has occurred in so many of the neighborhoods. Things are only trending upwards for the city and I would expect population to continue to rise as people flood in from job growth.
I agree regarding the hold, one thought is to get a solid estimate for the basement conversion, then do that conversion to a basic rental standard so that you get some CF, then hold off on any work or other plans on the upstairs until you see how the market is going.
Also, I have a 900sf 1BR in Foggy Bottom 3 blocks from a metro and Whole Foods with parking. It rents for 2200. Obviously you're talking a 2BR, but 1800 still seems a little high. I could be off of course, but id just triple check your rent estimates. I've never gotten above the low end on rentometer.
Andrea- Generally I would recommend holding the property, however given that the basement needs underpinning that is not something I would recommend taking on yourselves. Regarding renovating the upstairs while you live in it, that could prove to be very challenging and will certainly delay the process. Also, are you aware that DC is planning to crack down on Airbnb rentals? The DC Council is currently reviewing a bill that would create a regulatory system for short-term rentals, such as those found on Airbnb and HomeAway. This bill would forbid homeowners from putting anything aside from their primary residence on the short-term rental market, and it would cap the vacation rental limit to just 90 days. Of course knowing DC, this may take a while for them to implement but I would just keep in mind for the long-haul. You may want to simply live in the property and consider selling in the spring, as is, when the market is hot. Good luck!
@Marian Huish . Thanks for letting me know about the airbnb new regulation that they are trying to pass. I just read it and if I keep as my main residence by renting a room or by renting an English basement there is no effect on renting through airbnb if I live there 365 days out of the year.
Thanks everyone for the advise. Much appreciated !