First Time Investment : Duplex->Triplex/4plex conversion

[Cody Rigby]

Hello!

I am a first time real estate investor looking the following property : 

https://www.redfin.com/OR/Forest-Grove/2418-Cedar-Cir-97116/...

its a pretty large duplex in Forest Grove OR,  the trick is though, its on a lot zoned for a 4 plex so I am looking

into house hacking, converting into a triplex, then living in one unit while renting out the remaining two units

The left garage has been converted to living space, with a living room, half bath, a laundry room with a sink and some counters/cupboards and a bedroom, it is a part of what was an existing 3bd unit

If I were to acquire the asset, I would first attempt to convert that space into its own unit 

The line items as I see (be in mind, I am totally new to this) would be to 

>put up dry wall where the door to the rest of the house is,

>add a shower to the half bathroom 

>install a water heater in the adjacent 3bd unit

> install a kitchen in the laundry room, (
stove , oven , sink, counter space)

>add a shower to the half bath 

Assuming I can convert it to a 3plex, I could at-least cash flow on my investment after I leave 

My plan would be to put minimum down payment of 3.5% (FHA loan) that way I can have a decent amount of capital free to do the renovations

The only concern is when I crunch the numbers to get my ROI, I have no idea

how much its going to cost to convert the additional living space to a third unit

Any experienced investors here know how I can estimate this before I try to make an offer?

at first glance does this project look like its worth taking on or should I shoot for something more turn-key as a first time investor?

Thanks,

-Cody

[Melissa Hartvigsen]

Hello @Cody Rigby,

I am a local realtor and investor. Adding units at the Cedar Circle duplex could be a great value add. Forest Grove rentals are strong in the summertime when students are arriving for Pacific University. The rest of the year it takes a bit longer to fill a vacancy. In most of the Portland Metro I would say a 5% vacancy rate is safe for running numbers, in Forest Grove I would bump that up to 9 or 10%.

Start by contacting the city of Forest Grove. You can confirm the zoning (please don’t trust what is listed in the advertisement. When it was listed for sale in 2019 it was also marketed as easy conversion to 4-plex, but the current owner didn't do the conversion so I wonder why). Also, you can ask the city what the permitting fees are for adding units. If you convert the garages to studios or small 1 bedroom units, you can probably get that done for $75,000 to $100,000 per unit. The cost will go up substantially if you decide to expand the building footprint and roof. A standalone 1-bedroom unit would cost in the range of $175,000 to $200,000 to build.

Taking away the garage from the existing tenants will lower the rents on those units.

Currently they are:
4 bed 2 bath rent = $2,000
3 bed 1.5 bath rent = $1,600

I think the 4 bed 2 bath is the one with the partial conversion, and three units might look like:
3 bed 1.5 bath = Rent $1,500 (no garage)
1 bed 1 bath = Rent $1,100
3 bed 1.5 bath with garage = $1,600

Don’t be misled by the 6.6 cap rate in the listing, they are just using gross rents which is incorrect. 30% (25% expenses and 5% vacancy is standard in our market), and this is really a 4.7% cap rate. Most multifamily in our market sold for a 5.4% cap rate in 2023, and that would price it closer to $560,000.

Other things to consider for your offer: FHA financing requires you to move in within 60 days of closing. There is a tenant in each unit, and if they have lived there for more than 12 months, you must give them 90 days' notice to move out. (Oregon Landlord Tenant Law prohibits a seller from giving the tenant a vacate notice for a buyer to move in. You can only do that in single family homes). That could become part of your negotiation and offer with the seller, through offering non-refundable earnest money and having the seller make a cash for keys agreement to get a tenant out prior to closing.

Cheers,

Melissa