Converted vs. Intended Multi-Family Properties

16 Replies

Hey everyone!

I'm interested in the some input on the idea of "converted" multi-family properties vs. "intended" multi-families. We have recently moved to the Tacoma, WA, area, and in my search for rental properties (2-4 units), I've noticed that especially in some of the more established neighborhoods, there exist a plethora of properties that were built as SFRs but over time have been converted into duplexes, triplexes, and 4-plexes. My husband and I aren't seeing 100% eye to eye on the idea of investing in properties like these - he wants to stick only to properties built as multi-families, while I am more open to the idea of these converted SFRs.

Help us settle the discussion! I know there can be serious issues with older SFRs that have been converted - on some of the podcasts I've heard stories about inadequate plumbing, electrical, sewer(?) issues, etc... what else should I know about regarding these converted properties? Does anyone have any success or horror stories that can help me solidify my position or change my mind? Tips for estimating maintenance reserves, anything at all that you think might be helpful!

Thanks in advance, everyone! 

Always for Multifamily you need to look at  the main systems (heat, electric, water) and see how they are separated.  In a converted multifamily this can be more haphazard then in a built for purpose Multifamily but in both cases you still need to look at these systems.  Keep in mind building quality can differ even when something was built as a multifamily.   We have a nice converted MF but  there is shared heat (a negative) and shared water (a negative).   Electric is separate.  The structure itself is solid though.   I  think it is more about how well it is done then whether it was built for that purpose.  I would find out what worries your husband about the conversion and review the properties for that aspect. If he worries about paying for heat ,  or the quality of the electric that is a better focus then looking at "converted" vs "non-converted".   Also the older the units the more reserve for surprizes you should have regardless of whether they were converted.

Check zoning, you need to make sure the buildings are zoned properly.

Hi @Kate Kedenburg  ,

My family's current rental property is located in a city with many of these converted MFH properties, while my current locale sports many as well. I think @Colleen F.  is pretty spot on with her suggestions of what to look out for. If you're looking at old converted victorians for instance, I would worry more about the purchase of a 100+ y/o house rather than the partitioning of the units or the work done to split the electric, etc. 

A couple issues to also keep in mind: What is zoning like in your area, was the property legally converted to MFH or is that a headache to tackle after purchase? It sounds like the housing stock in the area has a lot of these converted properties, so renters are probably used to them, but if not it can depress rents. Things like sound deadening, floor plans and privacy can be compromised by the conversions. 

On the upside, these properties are usually markedly cheaper in the two areas I'm familiar with, so can potentially cash flow better than a purpose built MFH. 

Bottom line, if you do your homework on the property and know your local rental market, you'll probably do just fine with a converted MFH. Make sure you're both comfortable with whichever route you take though, big decisions like this can potentially split a marriage if the property ends up being a poor one. If you're not both on board, you could lose much more than the time and money it takes to address the property. 

@Kate Kedenburg  

Ahhhh, good old Tac town! I would guess that if you were to eliminate all non-converted properties your properties to choose from would drop by 70% and your cap rates would be cut in half.

I invest up the road in Everett where the same is true. My current portfolio consists of 2 duplexes, a triplex and a fourplex all built as single family homes. They all were built pre-1915 and built solid. Being a second generation REI I have worked on these types of homes all of my life. Typically they are built sturdier than newer homes slapped up during housing booms. As far as repairs and Capex go, depending on the property, we allocate 7-10% of rent for each (14-20% total).

These properties can be cash cows or money pits depending on purchase price and/or defered maintainence.

Awesome - thanks guys! 

@Colleen F.   and @Bradley Bogdan  - good points to look at the condition of the structure as a whole rather than focusing on the separated units, as well as taking zoning into consideration...that was something that I hadn't considered. In terms of rents, I've been looking in some of the "trendy" areas of town, where it seems like people are actually willing to pay a little more for a unit with some vintage characteristics like original hardwood floors or exposed brick, etc... rather than a place in a newer 100-unit apartment building down the street with laminate flooring and smaller rooms. This is definitely something I would want to look at more closely, however. 

@Grant Fosheim  - I'm glad to hear from your firsthand experience! You're right, there are way more of these types of converted properties on the market, and many of the newer properties built as multi-families that I've seen are outrageously overpriced and shoddily constructed... In terms of your portfolio, did you purchase your rentals after they'd been converted or did you do the conversion? Probably a stupid question, but when considering the quality of the electrical and plumbing work, is that something that an inspector could look at during the due-diligence period, or would it be necessary to separately bring in a subcontractor to look at those elements?

Thanks again!

A conversion MFH I was looking at went from a 4-plex needing electrical and deck work, to an illegal MFH that needed permits the seller would take care of, to a duplex as is (permits undetermined). Title insurance!

@Kate Kedenburg  everything I've purchased was already a legal du/tri/four plex. I've done none of the permitting or converting myself

@Kate Kedenburg All great advice you have received so far. I have owned both and my experience is that it is usually better to buy built for purpose multi-family buildings. Typically there are more issues with SFH conversions. Eg; One tenant too hot or cold, not enough sound proofing between units, not enough parking, not big enough septic system, etc. However, this is just a general observation I have had with my properties. Of course all of these problems can happen if a MF building if it wasn't properly constructed.

Hi Kate,

I am a Loan Originator for over 12 years now and the problem with the non-conforming multi-family is that they are hard to sell to buyers who want to use conforming financing…so be thinking long-term about your exit strategy. I’m also a landlord…and the problem I have is that I can’t get section 8 and other government programs to work with some of my non-conforming properties too….

I am currently dealing with a duplex that was converted to a 4-plex without permits and in a residential area zoned only for single residences and/or duplexes.  This was reported to the city and they are making me convert it back to a duplex and bring all systems up to todays codes.I was required to move all renters out (No income for months).  I was required to put in a 1 hr. firewall (from attic to basement) and have had to open up all walls to reveal the plumbing so any drains etc. not up to code can be corrected.  Everything requires a separate permit and the work has to be by licensed contractors.  This ordeal has been expensive.  My advice would be to know the zoning and verify that all work was permitted!

@Tim Cooper  - given your experience, do you have thoughts about the quality of newer construction compared to the older construction? I'm sure it has lots to do with the builders and location, etc, but some of the newer multifamilies that I've had the chance to look around in seem like they're almost...flimsy. Thinner walls, everything made of laminate (which I despise, though understand), and they're still wildly overpriced in my opinion. 

@Katherine Swanberg  - Good call on the exit strategy! I try to keep that as a primary consideration, but it always seems to fall by the wayside when I find a seemingly good deal and succumb to the "shiny object" syndrome...I also did not know that little tidbit regarding Section 8 or other government assistance programs.

And lastly, @Jean Mercer   - Ahhhh your experience sounds miserable! I'm going to take a lesson from you and the suggestions of others and add confirmation of zoning to the top of my "Things to Investigate" list! With your experience, did you have a standard home inspection before you purchased the property? Would a standard inspection catch any issues with plumbing or electrical that aren't up to code or is it necessary to bring in separate subcontractors to check all that stuff? 

Thanks again, everyone - I'm writing all this awesome info down!

Home Inspections only look at what is visible, electric and plumbing are hidden behind walls. Even if the work was done up to code - if no permits and city inspectors signed off, they have no way of knowing if it was done correctly.

@Kate Kedenburg That is a great question, but it is impossible to answer.  It is totally up to the quality of the builder and the material they used.  

A perfect example.  I recently looked at two 4-unit buildings.   They were for sale and had been for more than a year at $114,000 each.  They were fairly well taken care of, but cheaply built.  You could just feel it; when you walked on the floors they flexed.  

Soon after nine 4-unit buildings on the same block listed and sold almost immediately for more money, I think $125,000 each.  They sold so quick, I didn't even get a chance to look at them, but I know they were built by a different builder.  I did walk through one of the common halls, and it just seem more solid if you know what I mean.  My intuition just told me "better construction".

They were all built about the same time, in the 1970's and they were all 2/1.  

@Kate Kedenburg  I have owned a 1930's four-plex conversion for almost a year now. It was a good conversion in my opinion but I could see how a bad conversion would be a pain. Older houses are just more of a hassle in the rehab phase. Everything takes longer and costs more than you want (Even for an experienced contractor like me).  Not a bad thing, just be aware. There is something to be said (in my area at least) for apartments with a little more character than the modern boxes build today. This older conversion worked for me but may not work for others. 

Definitely get the regular inspections done and I would also consider bringing in a plumber and electrician. If the electrical circuits were not split up properly this could cost a bit to remedy. 

I bought a house that was estimated to be built in the 1920's and was converted into a duplex in 2003. I just learned (about two months after closing) that the property was illegally converted and it was not "grandfathered-in" as a duplex that is sitting in a Single Family Zoned property. Right now I am at risk for the city to tell me to convert it back to a single family property. I personally believe the risk is very low, but there is still the chance. When they converted, they did not split up the electrical or the HVAC, and I'm hesitant to complete the conversion now that there is a chance of having to change it back. Lesson learned for next time though! 

Thanks for the insight, @David Frandsen  and @Dru Steeby ! From all the valuable advice that everyone has offered, I feel more confident in what to look out for and investigate regarding older/converted SFR's - I can't thank you guys enough! I still feel like there's a good niche for these kinds of investments in my area; they tend to be more affordable than newer construction (with fairly similar rents), and I believe the "character" factor is definitely applicable, especially in the trendier parts of Tacoma. So, being sure to be extra diligent about investigating zoning, and spending a little more upfront to have a plumber and electrician look everything over seems to be the name of the game. I've got my eye on a few of these properties and once we get settled in our home we just closed on, we'll (hopefully) be diving in! Any continued advice or insights will be greatly appreciated - there's just so much to learn from talking with others and hearing about their experiences...Thanks again everyone!

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