Is It Better To Tear Down and ReBuild or Renovate Those Old Buildings

A lot of people don’t understand what I do. I take old apartment buildings that are in really nasty shape and, with a little love, bring them back to life. In the past I have dealt with buildings that were boarded up and had mushrooms, mold, bugs, asbestos, fire damage or water damage. When you walk into them in that condition they are really disgusting and the smell is often atrocious.

People often ask, “Why? Why wouldn’t you just knock it down and rebuild?” I have a 24 year old nephew that has helped with the demolition work on a few of my buildings. He appreciates the money he earns but doesn’t get it. He always thinks I should raze the building and start from scratch.

There are a few criteria in the decision to tear down or simply renovate. The most important of which is the condition of the building itself. You have to be able to look past the surface items like flooring, cabinetry, paint & drywall and focus on the ‘bones’ of the building. This includes the condition of the foundation, the roof, exterior walls and floor & ceiling joists.

Quite often the building looks a whole lot worse that it is. You can throw out the compromised carpet / hardwood, cut out moldy or wet drywall, remediate asbestos and replace fire damaged wall studs. Once you get the nasty out of the house it is then relatively easy to re-drywall, re-paint and put in new flooring and fixtures.

However, if the foundation, roofing or wall structure is compromised; then that, obviously, is a lot more serious. Are the problems fixable? Are they beyond repair? Will the cost to repair them be too prohibitive? If the answer to either of those last two questions is “Yes” then the decision is made for you. You have no choice but to demolish and rebuild.

If the building is repairable but at great cost then you have to do a cost benefit analysis to see which scenario – rebuild vs. repair – makes more sense. Remember in the “tear down and rebuild” option analysis to include the demolition costs, costs for architects and engineers, city fees and the time it will take you to maneuver a new building development through your local municipality and then actually rebuild.

The age of the building also factors into the decision. Really old buildings used much different building materials than we have now. I have owned buildings that used newspaper in the walls as insulation and that still had the old style knob & tube or fuse electrical system as opposed to the modern breaker system. Cast iron or galvanized plumbing pipes or aluminum electrical wiring are extremely expensive to replace. Sometimes it is hard to finance or arrange insurance for your buildings if they have these older materials.

On the other hand you can sometimes buy these buildings at such a discount because they have these issues that it makes it well worthwhile financially. You can also sometimes buy the property for less because the seller feels the property is worth land value only. If you can see a way to bring it back to life inexpensively you can do quite well.

I once bought a 100 year old boarding house for land value. The seller and her realtor expected any buyer to just tear it down. (A boarding house is an apartment building where the tenants share a common bathroom or kitchen.) The building had 5 suites without a bathroom plus a his and hers bathroom on each floor. The hallway was very wide. So wide in fact, that I was able to cut it in half and turn that extra space into separate bathrooms for 3 of the suites.

I then joined the two existing bathrooms with the other two units and ended up with 5 self-sufficient suites on each floor. In essence, I turned a boarding house into a true apartment building. It turned out to be one of my most profitable investments to date. Creativity is very important when renovating these types of properties.

In general, you want to avoid replacing as much of the old, obsolete items as possible as long as they still work. You want to avoid going into the wall because what you might find will often lead to great costs. Check with your local building code and municipality to see what you have to fix. You may be required to bring things up to code. An example of this might be when you are required to install a new sprinkler system in an old apartment building. Often, though, these items are grandfathered, meaning you can leave things as they are. All of these types of things have to be factored in to the analysis of keeping and renovating the building.

Each property is different and there are no set rules. If the building is physically unsafe or can’t be repaired then you have to tear down and rebuild. Usually it is not that cut and dried. You have to calculate the costs on both options to see what is the highest and best return of the final product. Which solution will give you the best return for the least amount of effort and time?

Trust me I don’t renovate because I love old buildings. It is simply often the better option. As I mentioned before things often look much worse than they are. By knowing what to replace and what not to you can keep your costs down. You also usually spend much less time renovating than you would by a) demolishing the original building b) going through the design / permit stage and c) building a new better building.

Read more about this in Comparing Real Estate Strategies

 

What A Prolonged Recession Teaches Us About Real Estate Investing

This past year was an extremely trying one for many investors – myself included. I was very happy to see the end of 2016. This has been one of the reasons that my blogging has been spotty the past few months – I have been putting out fires all over. Extended low oil prices mixed with questionable government leadership have led to very high vacancy and lower rents in the area that I invest in.

High vacancy and lower rents are not a great combination. This leads to low (or even negative) cash flow. An extended recession can really test your abilities, your resolve and your cash reserves. As you sit in the corner in the fetal position, sucking your thumb and rocking back and forth, it can even make you question your sanity for getting into real estate investing in the first place.

A couple of things have been made clear to me this year. First, the importance of having some savings and keeping money off to the side and second, the realization (or maybe more appropriately said, the reaffirmation) that real estate investing is a long term game.

Savings are critical to your success. I have written before about how I used to always invest any extra money that I had. I felt that all of my money had to be out working for me. Over the past couple of years I changed that strategy to have more of my investment money unused. I started to do more Joint Venture partnerships and make sure my existing properties were in good shape before I bought something new. I am really glad I did that. Having some savings allowed me to deal with the downturn in the economy without missing mortgage payments. (review a previous blog at: http://www.sabanabooks.com/managing-money-is-one-of-the-keys-to-real-estate-investing/ )

I would also strongly advise that you and / or your spouse continue working if one of you decides to start investing full time. You need regular cash coming in to make sure your personal expenses (food, mortgage / rent, insurance, transportation etc.) can still get paid if you end up with some temporarily negative cash flow from your investments.

When times are good and you are making good profit on your investments make sure to sock some of it away for those lean periods. I am glad I did that too. Perhaps it is the natural aging process but I found myself getting more and more conservative in my approach over the past few years. Gone are the run and gun, no holds barred investing of my youth. My new, calmer approach really helps in a recession.

I noticed as well that there is a ‘flight to quality’ in a recession. Tenants will search out the nicest place they can afford when rents in every building in a market start to go down. A newly built, nicely appointed property that rented for $2,500 last year and is now going for $1,600 will attract those renters who are still employed and have been paying $1,600 for a so – so building. The moral is to keep your places as nice as possible and treat your customers well all of the time.

During this difficult year, as I was digging into savings to pay some property costs, I never lost the long term vision of real estate investing. I had purchased my buildings at lower than fair market values, fixed them up, raised the rents and got good tenants in place during the good times. The lowering of rents (that usually happens due to the higher supply and lower demand of a recession) started from these new higher rents – that helped a lot. That is way better than lowering already low rents.

Recessions always end, however, so I realize that rents will come back up, vacancies will go down, equity build up will continue and resale values will return. Your long term wealth management is secure in real estate. The trick is to stay afloat long enough to see good days return. The key to that is proper cash management and having savings to see you through the rough patch.

Read more about this topic in Cash Management in Real Estate Investing.