When is a free building too expensive?

Question

I have an opportunity to get a large (8,000 SF) commercial building for free. This building is historic, and would come with restrictions. It's also in very rough condition, with an estimate of $1M plus in order to get it functional. Best use is probably apartments, and would be 5 to 8 units, depending on the amount of $ I sunk into it. I don't think it's worth $1M, I'm getting more like $500K - $600K as an ARV.

Opinions: is it worth it to get the building? Please note that "get it for free and sell it" isn't an option. This is "get it for free and fix it up-required" deal.

I'm thinking "get it for free, then figure out how to get it fixed for $500k or less". Please note that I'm an architect and a general contractor, so I'd have some savings on those fronts. The building needs pretty much everything, including foundation repair, new roof, structural repair, new plumbing, heating, electrical, etc. It's a mess.

David Sisson · Answer

For my local commercial clients - who have historic buildings - a lot of them are forgoing the federal tax (rebates? credits?) because the cost of historically correct construction isn't offset by the tax incentives. For this building, I think the city would require it anyway. Commercial tenants aren't worth much here - I already have a large commercial building and it was challenging to find tenants + the rental rate is fairly low. I'm considering pitching the city on the idea that I'll move my office into this building + do apartments. Ground floor apartments as handicap accessible. That would probably excite them. However, still would have issues with the $.

David Sisson · Answer

@Grant Rothenburger rent would be (gross) $4400 to $8800 / month, depending on number of units and price per unit. I'm planning on the low end of that. I don't have an ARV for selling, but it'd be a buy and hold regardless.

@Chris T. No violations, no zoning issues, no past due taxes. I have a good relationship with the city, and I can get some concessions from them. The city wants to see this property improved and could be convinced to do some property tax abatement. With that said, if I don't follow through, the city would find violations, so it's a double edged sword.

Nik Moushon · Answer

There are restoration/preservation grants for historic buildings. I would look into apply for some of those to help off set the cost. Go to the city and ask for tax breaks as well. It wouldnt hurt to ask if they would cover all the street improvements and utility hook ups as well. Or at least partial costs.Would this be viable as mixed-use? Shops at the street and apt. behind/above? This would actually increase your ARV more than if it was just apt. Who doesnt want to live above a coffee shop right? lol Plus commercial brings more to the cities purse than just apt so I think they would be more willing to cut you a break on taxes/infrastructure if you did this. Just an idea to look into. I'm jealous of your free building, the only thing i miss about the east coast is the old architecture. You just dont get that here in the west.

Jared W Smith · Answer

@David Sisson ...the architect in me would be all over this. However I know at this point it would very difficult to estimate ALL those repairs/renovations to construct 5 units. It seems like it could work honestly but then again like others have said, we do not have all the information on the property.

Chris T. · Answer

@David Sisson

Have you double check with the local municipality if there're any violations on this building?

If it's historic, are there restrictions to what you're planning to do?  rezoning?

Any liens, past tax dues etc?

Grant Rothenburger · Answer

@David Sisson If you're holding how much rent would it bring in? If you're selling, what's the ARV?

Nathan Hillier · Answer

@David Sisson

Im no expert, but definitely if the rents youd get out dont support the cost to fix up, its not worth it IMO.

It really depends on the details of the property - location, rents..etc. As well, its important to know everything about the deal and truly understand the investment fully so you can be confident you'll make a positive return on investment. If you dont know, maybe its best to walk away and get into an investment you fully understand and are confident you'll make a positive return from.

Its just my opinion, because personally if i dont fully understand the investment, i will walk and invest into what i know and understand. But also, theres a great opportunity to test yourself and grow in ways safe investments dont necessarily bring to the table. If you're willing to risk it, maybe it could be an amazing opportunity to grow, expanding on your current knowledge and hopefully make a positive return at the end of the day.

Good luck.

David Sisson · Answer

Planning on buy/hold. Saying that it's "ARV" is $600ishK really means:

1) That cash flow would only sustain a All-in of $600K and

2) That the current value of the building ($180K) would only sustain a construction loan of $540K (25% equity).

I don't know what the actual ARV would be. $600K would be on the high side for a 5 unit around here, but this is a unique building.

I'm wondering if there's some other way to make it work. Hard to turn down a free building.

Andrew B. · Answer

@David Sisson It is too expensive when the number just don't work.

Also, what type of investment are you trying to make this? Buy/Hold, flip, other? After your repair costs, will the place cash-flow itself? If so, go for it if that is what you are looking for. Flip, maybe not so much.

I was recently looking at a property for $10-15k. Figured if I could get something done all in at $80k, I'd have ARV of $130k and be all good. Unfortunately once I had a contractor walk it, it came to $200k+ in repairs. Wouldn't cash-flow, couldn't flip. Obviously I walked away at that point.

If you think there is a massive opportunity for appreciation in the long term and you have the means to sustain the property until then go for it. Otherwise, free always has a cost.

Good luck.