1 year into triple decker ownership, exit or double down?
Hi!
I bought a 3 unit in Boston (Hyde Park) last year and it's been a low-key year of ownership. I get maybe one call a month from a tenant. I live in one unit, other two are renters.
My tenant leases expire this month and I told them they're tenant at will until the spring, when I will write new leases. I'm starting to get cold feet. None of my tenants are bad tenants by any means, I just really don't like answering to them and solving problems for them. I don't like mowing the lawn and landscaping the front flower garden. I don't know if I can do a full up-to-market-value rent increase in one swing. I feel like I'm slave to the decisions previous owners made on the house, silly layouts, crappy windows, etc. The furnaces or the roof could go any day now. There's pipes in unheated spaces and exterior walls. For comparison, I once worked a job supporting crappy software and I loathed it to the same degree, I now work a job developing awesome stuff and there's so much more gratification. I'm wondering if renovation would bring me there for real estate investment - maybe that's more my place in this market.
I'm stuck between renting it as-is for as long as I can, or just gutting it and building something low-maintenance, nicer, and more profitable.
Right now it has a ~600sqft studio, ~1100sqft 1 bed 1 bath, ~1200sqft 2 bed 1 bath. Rents are/were $1.1k, $1.5k, $1.7k. Market rates should be $1.5k, $1.8k, $2.1k.
If I bump up the rents and rent my unit out, I can take in $64.8k/yr, mortgage is $32.5k/yr for a cash flow of $32.3k/yr. I can afford a property manager and write yard maintenance into the first floor lease. Instant headache off my hands.
If I gut it, I can turn the place into: ~1100sqft 1 bed 1 bath with 15 foot vaulted ceilings in the open concept kitchen/living area, ~1300 sqft 2 bed 1 bath, ~1400sqft 3 bed 1 bath with huge open kitchen/living area, 11ft ceilings. Rates would go up to $2k, $2.2k, $2.5k. (Yes it has 900sqft of free unfinished space I can use)
This would bump my yearly income up to $80.4k. ARV roughly $800k. Currently valued at $610k and I have 25% equity in it. Renovation would cost $150k-$175k, I can finance that cheaply short-term privately, then refinance and take that cash out. My refinanced mortgage would be $42k/yr, which means $40k/yr cash flow. A mere $7.7k/yr gain over how it is now. A lot of the repairs in that renovation are impending anyways (30yr old furnace and roof) so I'm not sure if I'm talking apples to apples here. I could also condo it after the renovation and keep one unit, but I haven't begun to look at the cost/benefit of that. I'm not too confident in any of these numbers, though.. the ARV, ARV rental rates, cost of renovation... If I'm off by 1% this whole thing could hurt for a few years! But I love the idea of contributing to it and building something I'm proud of, and I expect the neighborhood to continue to increase in value too.
Obviously this is my first rodeo. I'm so torn! I wish I could find clarity in the numbers. What would you guys do? (And if you're in the Boston area with a bit of wisdom, let me buy you lunch and we can discuss!)