Converting an office building to an apartment building
Bismarck, ND · Member since 2011 · 142 posts · 16 votes
Converting an office building to an apartment building
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Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
14yZach, I would be more concerned with the market for larger apartments than the initial start-up cost. Is the market strongest for 1, 2, or 3 bedroom units? Ideally you'd have a mix.
It's probably worth while sitting down with a designer of some sorts that can look at what's existing. You have some large rooms that can easily be turned into economy/studio apartments, etc...
It's am ambitious project for sure.
28 Replies
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Biggest issue is that the things an office building is missing (kitchens/bathrooms) are the most expensive to add.
Have you considered a more communal living type approach? I've seen places out here that essentially rent out rooms and have a common kitchen/bathroom. It's essentially a dorm type environment. Rents would obviously be lower, turn over likely higher (you're almost a motel), but the capital costs required to do the conversion would be considerably lower.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Hmmm, great location in Mandan. If you converted to say 800 square foot 2 bedroom apartments, you could get upwards of 16 units. Looks like market rent on a 2 bedroom in Mandan is in the $650 range so you'd generate about $10,000 in rent each month. Assuming 50% for expenses you'd have about $5,000 for debt servicing and cash flow. A $500,000 mortgage would run you less than $3,200 a month at 6.5% so there's definitely some potential there. I'd guess you're looking at upwards of $200 to 300,000 to pull all that off though.
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Yes, I would be able to purchase it for right around 200K. There isn't too much I would have to do with the property other than remodel the inside. This is a very sound building.
What Im struggling with his how much it would take to get it the way I want it. Im almost leaning towards making the units bigger and only having 10-12 units with half of them being 3 bedrooms that way I minimize the plumbing and electrical costs.
Im going to look at it again today... hopefully I can come up with a rough estimate of what I want this place to look like so I can get some accurate bids.
I almost wish this property wasn't so well maintained because then I would just forget about it. A well maintained 15,000 sq ft. building with an elevator is hard to ignore. I definately didn't want to do a project this big right off the bat but its in my nature to just go for it.
Also, this is in a renisance zone so I get a big break on property and state income taxes.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Zach, I would be more concerned with the market for larger apartments than the initial start-up cost. Is the market strongest for 1, 2, or 3 bedroom units? Ideally you'd have a mix.
It's probably worth while sitting down with a designer of some sorts that can look at what's existing. You have some large rooms that can easily be turned into economy/studio apartments, etc...
It's am ambitious project for sure.
- Investor · Millport, NY · Member since 2011 · 39 posts · 12 votes14y
One of the first things I would do is visit the Code Enforcement Office and check on allowability and any other potential complications (read "expenses", for you).
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Eric - that is a good point. At what time should I do that? Im guessing he should be involved in every step of the way, huh?
Nathan - I would like a good mix, maybe something like 6, 2 bedroom, 4 3 bedroom, and 2 1 bedrooms. Something to that extent so I can be deversified.
Part of my logic is that there are plenty of 12 and 24 plexes going up and all of their units are in that 600-850 range. It might be a good idea to have some units that are slightly out of that range to avoid direct competition.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
If it's a really great deal go ahead and lock it up with as cheap earnest money as possible now to get rid of competitors so it changes to pending status.
I can guarantee others are looking at it right now and running the research you are as well.
Get it locked up cheap and then do most of your research in your due diligence period.
If you find you do not want the deal you can always assign it for a fee if allowed or bring in a partner to help with additional costs that is discovered or you can negotiate the price down further.
I see it everyday where an investor does too much upfront work and do not get it under contract and lose out to someone else.
- Investor · Millport, NY · Member since 2011 · 39 posts · 12 votes14y
I consider it a step that is necessary to evaluate the deal. It may not be legal to put apartments in this building due to zoning restrictions. Maybe you can fight that, but it costs money and there are no guarantees you will win. If it is legal, what requirements will there be to receive a certificate of occupancy? Are there costs associated with this that you had not considered?
I, coincidentally, just looked at a commercial building in a nearby city that seemed ideal for conversion to apartments - great location, great building. Off street parking on property - but wait - talked to codes office and found out that available parking, though it seemed adequate by my calculations, was only about 60% of what is required by code for an apartment building - and there is no other available land. That changes the whole equation for the economics - whether I chose fewer apartments, apply for variance etc.
Short answer, I want to know right away.
- Investor · Millport, NY · Member since 2011 · 39 posts · 12 votes14y
As I was answering, Joel gave you other information that I also think is valuable. Basically, control the deal. Get a lock on it right away if you think it looks good, but make sure you have an out if your homework says, "No go."
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
How do you lock in a deal while leaving an out? Just list it as a stipulation in the purchase agreement?
I think my biggest problem is finding a contractor that is able to see what I tell him and execute the plan. If I knew I had a guy that had experience and knew what he was doing I would have already bought the property. This is where I wish I had a relative that was a plumber and another that was an electrician. I don't mind hanging dry wall and the demo but Im not going to get myself electricuted!
This property is zoned for multi family.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Electrical is easy... just stop short of wiring into the circuit box and there's no juice to electrocute yourself with... that said, you probably don't know all the compliance rules to pass inspection anyhow...
Generally there's several outs... either through financing or inspection. There's always SOMETHING in the inspection report. Make an unreasonable demand, seller doesn't agree, sorry, contract falls apart. Or you can simply sacrifice your ernest money and walk away.
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Zachary Dosch:
Eric - that is a good point. At what time should I do that? Im guessing he should be involved in every step of the way, huh?Nathan - I would like a good mix, maybe something like 6, 2 bedroom, 4 3 bedroom, and 2 1 bedrooms. Something to that extent so I can be deversified.
Part of my logic is that there are plenty of 12 and 24 plexes going up and all of their units are in that 600-850 range. It might be a good idea to have some units that are slightly out of that range to avoid direct competition.
You just have to be careful when everyone is going one way. On one hand, that's a pretty strong signal for what the market is... on the other, following the crowd makes competition tough... but to go against the crowd you're essentially saying you're smarter.
My personal strategy is to follow the market and simply try to carve out better than average deals. I'm not going to buy Walmart or Microsoft at the start up stage as a speculator because I saw huge appreciation potential before anyone else... but I'll sift through the solid performers and try to find the corner cases that are neglected and get predictable and above market returns.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
In development cycles there is a under supply,sweet spot,and OVER supply.
A certain asset class can be over built and it is often times a race to market on who wins.
If your project takes to long to complete and the market gets saturated by that time then you will have to reduce your anticipated rent rates and cash flow projections to bring in new tenants or you will have to spend more on amenities to justify them paying a premium price.Either way it will cost you more money.
So don't look at what the market is today look at what the saturation levels and pricing will most likely be when you come to market with a finished product.
Don't be too rosy in your projections.This is what killed many developers who used high leverage and bought in 2007.They overpaid for the old building or land,used too high an ltv (90%),and had high rents expected on the cash flow which skewed the projects anticipated returns.
When things finally came to market debt service was high and rent income was low and many developers with non-recourse walked.Today everyone wants to nail you to the wall to lend any money so you have to be ultra conservative in your numbers.
- Real Estate Investor · Chicago, IL · Member since 2012 · 1 post · 0 votes14y
Originally posted by Zachary Dosch:
Nathan - I would like a good mix, maybe something like 6, 2 bedroom, 4 3 bedroom, and 2 1 bedrooms. Something to that extent so I can be deversified.
Generally, for larger props, you would want more 1 Bedroom units, as they will generate more rent PSF.
Sorry to randomly jump in; its rare that a newbie like me knows an answer!
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Originally posted by Tyler Raine:
Generally, for larger props, you would want more 1 Bedroom units, as they will generate more rent PSF.
Sorry to randomly jump in; its rare that a newbie like me knows an answer!
I'd absolutely agree with this... but I would counter that 1 bedroom units also have higher turn over... and thus more repair expense and higher vacancy rates. How does that play against the $/sq?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
It depends on what the tenant base is.
Efficiencies and one units have a bunch of negatives.
Turnover and reconditioning cost is high.Lenders upon refinance also do not like 100% 1 unit buildings.
So it can be hard getting cash out after rehab with that unit mix.
Also what happens is usually if someone fall son hard times with a2 bed they can get a roomate and stay.If the girlfriend gets pregnant they can convert the second bedroom that was an office back into a bedroom.If the girlfriend of wife gets pregnant a second time they can take the 1 bedroom and take out the one bed and put a bunk bed in.
With 1 units unless it is an abnormally large space for a 1 bedroom most tenants will move to a 2 bedroom.
I personally like 2 bedrooms unless you are talking college dorms or seniors that need a 1 bed or studio space.
- Investor · Duncansville, PA · Member since 2011 · 26 posts · 5 votes14y
Be sure to research the codes very carefully. I tried to convert a four unit building into a 6 unit building a few years ago and it was an absolute mess. Here arena few highlights that you should check:
- Accessibility- once you get over a certain number of units a % of the units must be accessible
- fireproofing in between units- includes walls, ceilings and floors
- sprinkler system
- if second floor- need two enclosed staircases
- parking as someone mentioned
Bottom line for me was my estimate of converting an easy 2additional units was $30k. Aftter revieiwn - Investor · Duncansville, PA · Member since 2011 · 26 posts · 5 votes14y
Sorry.. After code modifications approached $90 k additional without architectural costs. A lot depends on the reviewer or code official because the IBC is very subjective when it comes to rehabs. Just need to be very careful
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
I took a close look at the property yesterday and I have some updated:
With out moving many walls and doing too much to the plumbing and electrical, the property could easily be set up for 5 3 bedroom units, 2 2 bedroom units, and 3 1 bedroom units. I actually couldn't believe how set up the property already its. I would have to add a wall here or there and maybe move some plumbing around but its going to take a lot less to get this play looking the way I want it to.
There are about 30 off stree parking spaces and there is room for a couple of garages but Im thinking that could be a project for a couple years down the road.
What Im more concerned about and what Im working on today is getting somebody in there to look at the heating system, electrical, plumbing, and roof. I just don't know enough about those items to trust myself.
Also, something one of my buddies brough up to me is a sprinkler system. Is this something that is 100% necessary and if it is, how much do they typically cost. They thought $5/sq ft which would mean about $75m. Thats scary but not a deal breaker.
Something else I came across yesterday is PACE loans. I would qualify for a Flex Pace loan that would essentially buy down about 150k worth of interest on the loan making this an even sweeter deal. Its basically for downtown development projects that add great value to the overall area. Has anybody utilized this program before?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes14y
Haven't used Flex Pace.Sounds like a local program to your area but I could be wrong.
Remember with the rehab it's NOT what YOU want that matters.Code is going to TELL YOU what you have to do for the rehab.If they want sprinklers put in then you have to put them in.
Figure out all that they want and cost it out for a TOTAL cost.What contractors love to do is quote you separate items and not the cost of the total job.The they slowly take long to do the job and milk the fees.
Add 10% as a contingency fee to whatever the highest price they tell you and then get them lower to an accepted price.
When you design these units having in suite laundry is huge so make sure to add that.At least have the hookups there.
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
Ive been on the phone with inspectors all morning. This is sure going to be interesting to see how this all comes together.
My next step is getting a good contractor into the building that really knows what he is doing and has done this type of work so I can get an accurate estimate of what this is really going to cost me.
Im actually having a lot of fun with this and am really enjoying the process. It must be a blast to be able to do this full time!
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
I just wanted to resurect this thread becuase Im zeroing in on what this will actually cost me and what type of income it would generate.
Roughly it would generate $11,300/mo (4 3bed, 6 2bed, 6 1bed & Im operating on the conservative side for the rent amount).
Expenses would roughly be debt service of about $6,600, $900 for property insurance, Its exempt from property insurance for 5 years (renisance zone), $700 in maintenance, and I would do all the property management.
We are talking the place from the gutting phase all the way to turn key for a million bucks. Its not a great deal on the renovation being I would be using a general contractor, but for not putting any money down (because Im offering a lot worth 300k as collateral) Im thinking this could be a decent situation.
Initially I just wanted to do the bare minimum (about 600k) to get the building up and running but the more I think about it, the more gutting it make sense. Getting all the wiring and plumbing correct with out gutting the place would be next to impossible and this way I would be able to get in a couple more units.
How are you guys feeling about the deal now?
- Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes14y
Per the 50% rule, you're cash negative with that debt servicing.
I'm assuming you mean exempt from property taxes for 5 years? What would they be after that?
$900 for homeowner's insurance is VERY low. I'm paying $600 - 800 for single family homes (duplex and quadplex). I would think you'd be several times that in an apartment building of that size.
What's the vacancy rate in Mandan currently? You don't have that listed in your expenses.
$700 in expenses is about 5%... most use 10% though if you go through a full gut job it should be lower for a few years... remember this is an old building though. Does this also include your Capex budget?
What about things like mowing the grass, keeping the common areas cleaned, utilities to common areas, water/sewer/garbage for the building, snow removal (ND after all)? I didn't see a budget for that.
Who's doing your books? What's the eviction rate in ND? You may want to plan some fees for a bookkeeper, lawyer, accountant, etc.
Given what I remember about ND, Mandan (grew up there) is very working class. Sounds like you're planning an A Class remodel when a C Class would generate 90% of the rents at a fraction of the cost.
I would try to keep my debt servicing in the $4,000 a month range (P&I). That gives you about $650,000 @ 6.5% for 30 years.
- Bismarck, ND · Member since 2011 · 142 posts · 16 votes14y
That insurance is a monthly figure - North Dakota is very low compared to most states.
There is seriously a negative vacancy rate in Mandan right now. Very bizzare but people are begging for a place to leave. I would have it all leased up well before the project would be done.
I did go a little low on the maintenance budget but I figured if everything is brand new and the construction company guaranting their work that I shouldn't have many expenses for a while.
Taxes will roughly be 900/mo after the 5 year tax free period ends.
I included the up keep with the property in the maintence budget. I would be the property manage at least to start. The property is literally like 2 blocks from where I work so at least it would be convenient.
I have an accountant and I would be able to use the lawyer we have a work being I would pay him out of my own pocket. I would keep the books - I should be good at that by now.
I didn't realize you actually grew up in Mandan. When did you move?
Mandan has changed quit a bit. There will be quite a few new businesses moving into the area, including a Wal-Mart super center. Believe me, the fact that this is in Mandan doesn't make me feel good but I think I could be getting in at a really good time. Another good aspect is this would be about a 2 minute drive from the interstate which is a big deal with so many people living in Bismarck/Mandan and commuting to the oil fields.
I realize this is going to be a tight deal because I am financing 100% of this but with all this said, do you think this is a fesable project? Its borderline but I really think that something can be done with this building.
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