To upgrade apartment to 3 Bedroom Unit in NW District (or not)?

3 Replies | Portland, Oregon

We recently bought a 5-unit building on NW Kearney Street (right by the hospital) and have an opportunity with our largest unit (+/- 1500 square feet with a private deck and parking spot) to update from a 2/1 to a 3/2. The question is to go 3/2 or go 2/2. My Property Manager tells me that 3 bedroom units are actually more difficult to rent out (in this area) and the tenant quality will be worse. (I should add that no matter what happens, we're adding a 2nd bathroom as it's a 2 story unit and the top story needs a bath. 

I believe that prospective rent on a 3 bedroom in this area is probably in the $3000-3200 range, while prospective rent on a nice 2/2 in the same building is probably max $2700. However, the tenant quality (so I am told) for a 2/2 is significantly higher, while a 3/2 is more likely to attract three separate renters (i.e. a flop house). 

I'm trying to avoid the mistake of managing by spreadsheet (i.e. adding a 3rd bedroom to a very large unit - ~ 1500 square feet) will increase the prospective return for the investment, which looks good on paper, and remember to balance that with property level considerations, quantitative considerations like getting the best tenants. I've also been told that vacancy rates on a 3 bedroom apartment are actually higher than a 2/2 - so the reality might be that going 3 bedroom would actually be worse off economically once you factor that in. 

This is my first investment property, so it's a big consideration. Does anybody have any thoughts on this matter, especially who knows the area well?

Thank you!

Arie 

I will avoid 3 bedroom on top of the vacancy concern. Sq ft per dollar wise, 1 bedroom is the best return and it is easy to get 1-2 prospects approved at a time. However, it suffers the highest turnover among all 3 types. 3 bedroom  is the worst Sq ft per dollar wise and takes more on repair and maintenance if anything happens. And of course even harder to get 3+ prospects all approved on screening at the same time. If I had a property that I can either go 3 bdrm or 2 bdrm + 1 bdrm, I would pick the latest. My 2 cents. 

Thanks so much, Kelvin.

In this specific case the unit is not built in such a way that I could sub-divide it into separate spaces (there are also zoning restrictions for density, etc.). I can either make it a 2 bed 2 bath (1500 square feet) or make it a 3/2 instead.

It sounds like your feedback is that keeping it 2/2 is preferable to going 3/2. I guess the question is - with the same size and square footage, would the calculation change? I.e. going 3:2 would earn a higher rent for the same space, but qualitatively you may have more turnover, more maintenance, etc?

Even though 3 bdrm may yield higher income on paper, the longer vacancy and cost of repair esp. renting to a family with kids could possibly offset the income benefit the 3 bdrm brings. Depends on the structure of the property, it might be possible to convert to 2/1 + 1/1 but would need to go thru the City of Portland approval and to get permits to do so. I doubt the City will turn down your proposal with this on going housing crisis in Portland. An architect should be able to tell you the cost and procedure entail for the conversion. I done a conversion of a 2 stories 2000 sq ft. 4 bdrm unit to two separated units 4 yrs ago. It just the matter of putting  the right team( reliable architect and GC ) together, get enough of cash and do the math right.

By the time you sell it, it will be sold as two units ( ~$150k - 200k per unit in average) instead of one unit and the performa also looks better with 2/1 + 1/1 income. It might be overwhelming to a first starter but it is doable.