6,000 square foot brownstone in Boston - what to do?

22 Replies

I recently inherited a brownstone multifamily in Boston. Building is about 6600 square feet. Zero debt. Great situatio coming out of an unfortunate family death...looking to do the best with it that I can.

Outdated units - in good shape, but older fixtures, older floors, radiators for heat, no AC, and no parking (although can add through right of way purchases, call it $50k). One unit is 4 beds, the others are 3. All have 1 and a 1/2 baths. Current value is about $2.8M. Rents are currently way below market value (it was my Mom's and she wanted tenants that she liked), about $8,500/month. Market rents more like $10,500/month without any renovation.  After full renovation market rents would be closer to $13,000. Full renovation would probably take 18 months and cost about $700k, another $100k to condo them out. If the building was turned into condos, each unit would be worth about $1.7-1.9M in today's dollars, more in the future., so let's call it a total value of $5.4Mish now, maybe $6M in a few years.  For those of you that don't know Boston - it's not a cash flow market. This is a B+ area (actually in Brookline, not Boston), very good schools, near public transportation, and walking distance to dozens of restaurants.

Complicating matters is I live in California, the building is in Boston, and I have no intention of moving. Further complicating things is it could be problematic to renovate one unit a time while renting the others out due to the disruption the renovation would cause as well as that opening up the walls could require that the entire building be brought up to code (it's 90 years old). I could be opening up a can of worms by doing a big renovation and not having an exit strategy.

The way I see it, I have 4 options. I'd like your collective input on which ones makes the most sense.  For the sake of argument, imagine I have the cash to do any of the options below. 

1. Do nothing. Rent the units as is, collect roughly $7,000 a month in cash flow while borrowing about $800k to invest in other properties. The loan would eat into the cash flow, but building would still be cash flow positive every month. Ok cash flow, but a lot of equity tied up.

2. Renovate and rent. Call it $700k to renovate and market rents of $13,000. This could be riskier because of the construction risks mentioned above, but would allow me to retain the building and it does have some sentimental value as I grew up in the building and my Mom lived there for 40 years. i could still borrow against it and invest the borrowed amount in other deals and, with higher rents, I could borrow more and still be cash flow positive, albeit I'd have to use some of the loan to pay for the renovation. Managing the renovation from 3,000 miles away though and the risk of things going poorly without an exit plan.

3. Sell now. Don't do anything, sell for around $2.7M, and invest the money - mainly in MF that cash flow better and some syndication deals, along with a bunch of leverage.  I could easily turn this one $2.7M into a $9M real estate portfolio. Super easy, low risk way to get $2.7M in cash to invest, but leaving money on the table compared to #4.

4. Renovate and sell. This would probably take 18 months to 2 years but the tenants are on month to month leases so could be moved out at any point. SWAG that it would be $700k to renovate the units and another $100k to turn it into condos. So $800k but it would increase the value of the building from $2.7M to probably $5.4 by selling off the condos individually. I've looked a previous sales in the area and that, plus some appreciation over the next 2 years might mean the units are worth $6M when sold. Clearly this is the best overall return but would also have the hassle of managing the renovation and sale from 3,000 miles away.

What would you do if you were me? Thoughts appreciated.

@Alan Miegel I’m sorry for your loss. Probably good to take a little time to really play out the scenarios and see which one really fits into life goals and vision in the next 5 years. My intuition tells me that given a really hot multi family market nationwide and deals harder to come by, what other investment right now can you take $800k to make an extra $3.2M (from $2.8m-$6m) in the next 18 months? If by the time you finish construction and the market tanks you still have the option to rent out each condo for the 13k/month or so until values come back. I may be over simplifying but if you took the condo conversion route, you can pull out $1-2m and still probably cashflow and use that money to buy bigger deals if you wanted to hang on to the deal.

I’m probably not the best person for advice here since I’ve never done a 7 figure deal.

My condolences once again and wish you the best of luck and prosperity whatever route you choose,

How many units are there?  3 I assume based on the numbers.  If the condo conversion project is viable and the number as you quoted are in the ballpark, looks like a great project.  Consider a local partner that has done similar projects.  Perhaps we can help you validate those numbers and assumptions, by providing the property address or some additional details?

@John D. Yes, 3 units. potential for a basement unit as well, but that would require a zoning variance.

The rental income compared to the value seems uninteresting to say the least.  

Have you fully explored the renovate and condo conversion option?

What is the property address?  Hard to give you more specific advice without more info.

Maybe do nothing for now. Reaccess the situation after 18 months. 

@John D. Yeah, property value in the area is high due to it being a B+ area with great schools. People pay premiums to own in the area due to great schools and proximity to downtown Boston.  I've done a lot of research...rents and property values are solid +/- 5%.

@Alan Miegel   Here are a few thoughts from a Boston native.  (Born and raised in the Jamaica Plain part of Boston)

Landlord/tenant laws in MA are insane.  A tenant who knows how to play the system can tie you up in court for a year without paying you a dime.  Courts tend to view landlords as evil capitalists who make their living from the sweat on the backs of the poor.

Boston is also notoriously difficult when it comes to renovation.  Building inspectors are slow but brutal.  You can expect renovations to take a lot longer and cost more than they would in any other town.

I don't know about Boston specifically off the top of my head, but many towns around here use a rule like this:  If the cost of renovation is more than 50% of the assessed value of the building (not including the land), the entire structure must be brought up to current code.  

Adding to that complication is the fact that assessments in this state are almost always less than the actual value.  It's 50% of an artificially low valuation that triggers that clause.

On condo conversions.  Here are notes from a class I took.   

MASS LAW Chapter 183A covers condos and co-ops, applies to all cities and towns not already having restrictions which take precedence over the amendment.

Special protection is provided for age 62 and over, legally handicapped, low and moderate incomes as determined by HUD.

Tenants must be given notice of the owner’s intent to convert to condo - notice must contain the following:

  • Owner has filed or intends to file Master Deed or other necessary docs
  • The tenant has 1 year to vacate. Protected class has 2 years to vacate.
  • Leases must be honored.
  • Tenant has the right to buy the unit at equal or better terms than the public by providing an owner signed P&S with at least 90 days to accept the offer.
  • Owner must provide moving expenses up to $750 or $1000 for protected class, payable within 10 days of the move.
  • Owner must assist protected class in finding comparable housing.
  • If housing cannot be found, time to vacate extends to 4 years, during which time the rent can only be increased by an amount controlled by the Consumer Price Index

So condo conversions can be done, but in my opinion, the real zinger is that last bullet point.  

The housing shortage in Boston is profound.  Q1 2019 numbers say that Suffolk County (Boston, Chelsea, Revere, Brighton, Winthrop) are at 1.3 months of supply - an astronomically strong seller's market.  That means that you may well have to allow the full 4 years for the current renters to vacate.

If it were me doing this from 3,000 miles away, I'd rule out both renovating and condo conversion.  I'd either keep it and slowly raise rents closer to market value, or I'd sell and reinvest in another location.

If you want to PM me the address, I'll run comps so you have current numbers.

Good luck in whatever you decide!

Hi @Alan Miegel good luck to you and your family on this. Another alternative would be to pair up with a reputable local developer (there are some!) as partners.you bring the property to the table, they bring the renoand permitexpertise etc.

More directional advice than specific, but there is Enough money there to incentivize a good project. Maybe you hang on to one of the units, etc.

As you probably know, Brookline and Boston  two different cities but also In different counties and have very different approaches to permit in codes etc. 

Cash comes and goes but a+plus assets That can produce safely over a long time are rare So I certainly wouldn’t rush to get rid of it. You can always take the process through the approval for condominiums even while keeping as it is so that future changes and conversion laws will find you grandfathered. That alone will increase the value

Oh and definitely buy the parking no matter what direction you decide to go. That’s a huge plus

@Alan Miegel

I'm not 100% but your cost basis is now the full amount of the property. Making it almost all tax free.

@Alan Miegel   Sorry to hear about your mom.  One thing you haven't mentioned is tax implications.  You may want to ask an accountant how that works.

Doing extensive renos from a distance won't be easy.  Based on what others said about doing renos in Boston, I'd opt to sell it and get something closer to home.

I live not too far from there and have renovated 2 multi families. I can tell you right now that your renovation estimate is at least $500k low. The costs of renovating in congested Boston area properties is completely unrelated to costs elsewhere in the country. The construction market is extremely tight, labor costs are high, timelines take longer here than most places, parking and construction staging is a huge issue that you have to pour money into, and if you are planning on selling these at prices in the $1.7M+ range buyers are going to expect high quality finishes. 

I would not want to manage a renovation of that size from across the country unless I had a full-time construction manager on salary. That's an option, but now you have to add even more money to pay for someone good (although they may save you money elsewhere to offset some of their salary), and it also assumes you can find someone.

I would do either option 1 or option 3. Both 2 and 4 are going to cause you untold heartache and you won't make as much money as you think you will.  If you decide to go with option 3, I am a also realtor and would be happy to talk strategy with you. 

@Alan Miegel

I would suggest find out all estate tax implications then decide if you want to long distance or sell and be closer to home. This market is crazy here so your in great shape with almost any choice . You will have to probate unless will is simple . Might help in decision if you have to wait a year while in probate as well.

Originally posted by @Alan Miegel :

I recently inherited a brownstone multifamily in Boston. Building is about 6600 square feet. Zero debt. Great situatio coming out of an unfortunate family death...looking to do the best with it that I can.

Outdated units - in good shape, but older fixtures, older floors, radiators for heat, no AC, and no parking (although can add through right of way purchases, call it $50k). One unit is 4 beds, the others are 3. All have 1 and a 1/2 baths. Current value is about $2.8M. Rents are currently way below market value (it was my Mom's and she wanted tenants that she liked), about $8,500/month. Market rents more like $10,500/month without any renovation.  After full renovation market rents would be closer to $13,000. Full renovation would probably take 18 months and cost about $700k, another $100k to condo them out. If the building was turned into condos, each unit would be worth about $1.7-1.9M in today's dollars, more in the future., so let's call it a total value of $5.4Mish now, maybe $6M in a few years.  For those of you that don't know Boston - it's not a cash flow market. This is a B+ area (actually in Brookline, not Boston), very good schools, near public transportation, and walking distance to dozens of restaurants.

Complicating matters is I live in California, the building is in Boston, and I have no intention of moving. Further complicating things is it could be problematic to renovate one unit a time while renting the others out due to the disruption the renovation would cause as well as that opening up the walls could require that the entire building be brought up to code (it's 90 years old). I could be opening up a can of worms by doing a big renovation and not having an exit strategy.

The way I see it, I have 4 options. I'd like your collective input on which ones makes the most sense.  For the sake of argument, imagine I have the cash to do any of the options below. 

1. Do nothing. Rent the units as is, collect roughly $7,000 a month in cash flow while borrowing about $800k to invest in other properties. The loan would eat into the cash flow, but building would still be cash flow positive every month. Ok cash flow, but a lot of equity tied up.

2. Renovate and rent. Call it $700k to renovate and market rents of $13,000. This could be riskier because of the construction risks mentioned above, but would allow me to retain the building and it does have some sentimental value as I grew up in the building and my Mom lived there for 40 years. i could still borrow against it and invest the borrowed amount in other deals and, with higher rents, I could borrow more and still be cash flow positive, albeit I'd have to use some of the loan to pay for the renovation. Managing the renovation from 3,000 miles away though and the risk of things going poorly without an exit plan.

3. Sell now. Don't do anything, sell for around $2.7M, and invest the money - mainly in MF that cash flow better and some syndication deals, along with a bunch of leverage.  I could easily turn this one $2.7M into a $9M real estate portfolio. Super easy, low risk way to get $2.7M in cash to invest, but leaving money on the table compared to #4.

4. Renovate and sell. This would probably take 18 months to 2 years but the tenants are on month to month leases so could be moved out at any point. SWAG that it would be $700k to renovate the units and another $100k to turn it into condos. So $800k but it would increase the value of the building from $2.7M to probably $5.4 by selling off the condos individually. I've looked a previous sales in the area and that, plus some appreciation over the next 2 years might mean the units are worth $6M when sold. Clearly this is the best overall return but would also have the hassle of managing the renovation and sale from 3,000 miles away.

What would you do if you were me? Thoughts appreciated.

 Alan,

Sorry for the death in the family. That's always heart breaking.

Here's my suggestion, which is not one of your 4 options.

JOINT VENTURE with a credible local developer

  • Sell 50% equity ($1.35M) and go in with a LOCAL developer as 50% TIC. The benefits to you are: this will generate $1.3M cash for you, you keep half the cashflow ($3500 a month), the $1.35M upfront cash the developer needs to come up with will eliminate a lot of the tire kickers and you will only have the serious players.
    The benefit to the developer is that he gets half the cashflow which helps him a little bit while renovating the property so he can pay some of his holding cost, specially if he needs to borrow some money for that $1.35M 50% buy-out he would pay you.
  • You can then invest that $1.3M cash in syndicated apartment deals giving you more cashflow. Say you get a yield of 8%, that's $104,000 a year in income for you.
  • The developer can take his time renovating the property, the right way, over 18 months to 2 years with him watching the project like a "hawk" because he has substantial skin in the game.
  • He develops the property, converts them to condo's and sell for $6M. Say the development cost is $1M. Profit is $3.65M - and you get 50% of that, an additional $1.8M.

The risk of this approach was that the developer could run out of money with a project half finished with mechanics liens on the deed. So vet the developer carefully and see projects he has worked on in the past. If this happens, you can always sell the half finished project to another developer at a substantial discount. SO net, the risk of doing a JV is low, and puts more money in your pocket (you make almost $3.5M profit plus have additional passive income of $100K+/yr from syndicated deals and you get $3500 a month cashflow while the project is being developed).

Makes sense?

Sorry about your Mom.

Don't be sentimental about it. It's a business decision with some pretty large numbers.

Reading local folks comments, I think I would sell. It is all the way on the other coast.

@Alan Miegel

So sorry for your loss. I actually have lived in Mass almost my entire life and live just outside of the city. I'm in the construction business and so is my brother. The company he works for does high end apartment/condo renovations if you're interested in going that route. Feel free to send me a message or connect! Either way you go, you'll be making great money. I wish I had enough to take it off your hands!

Sell it and you don’t have to do anything with the money as there are likely no or low tax consequences, you can let the money sit in the bank until you know what to do with it. At minimum hire a good pm as you can’t manage this from the bay.

@Jason Turgeon thanks for your input. These are in Brookline, Coolidge Corner Area. Would you think the cost would be any less?

@Michael Ealy I like this strategy - get some cash, get some upside. Any recommendations on finding a good developer?

Originally posted by @Alan Miegel :

@Jason Turgeon thanks for your input. These are in Brookline, Coolidge Corner Area. Would you think the cost would be any less?

 No, that's a very expensive location to build with high density, limited access, difficult logistics, and high prices for everything. And if you want to get those $1.7+ million selling prices you had better be offering a complete gut, high end renovation that saves all the architectural details and charm. $200/sf minimum. 

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