Convert fourplex to townhomes??

Question

Hello BP community! I am a first-time investor and have potentially found my first deal, an out-of-state fourplex with each unit consisting of 2 bedrooms 1.5 baths and approximately 1,300 sf. There's not a lot of opportunity for forced appreciation through renovations, nor is this a below-market deal; so this is ultimately an opportunity to acquire a stable asset that produces solid cashflow...a nice long-term hold property. From an exit strategy standpoint, I am wondering if anyone has ever gone through the process of converting a multi-unit rental property into townhomes to maximize valuation? I'm assuming this is very dependent on the local zoning ordinances and will require a knowledgeable local professional (i.e. an attorney or consultant), so my question is more focused on the generalities of being able to accomplish this and what your experience was in doing so. Appreciate everyone's insights!

Brandon Sturgill · Answer

Hey @Scott Lewis I don't think that converting 4 large 2BR apartments into side-by-side townhomes would impact the valuation...that is, unless it would. The factors here are several layers deep...1- The threshold decision is rooted in local ordinance and zoning...if you're in an area with tight local ordinances you're fighting with the people that live in the neighborhood before you ever reach the city zoning folks...this can go one of many ways2- ROI on the conversion...you're first stop should be with a local architect...they are worth their weight in gold when navigating a project like this and will wade through the regulatory waters much better than you...and a simple phone call may be telling to whether the conversion would be permissible.The extension of this is the cost of the renovation in relationship to the rents received...the stars would really have to align to say you should spend a significant amount of cash to convert a performing building with 4 revenue streams to serve another function (but there is more to this)...and the cost of construction (and lumber in particular) is 5 fold what it was 1.5 years ago...3- As you indicated...exit...I think the only rational reason to convert a 4-unit would be to get condo status or single family/ shared wall and sell one or both of the units to an end buyer (you are basically paying the role of a speculative developer here)...this is happening frequently in locations like Olde Towne East and Merion Village...hard to demonstrate how successful this has been, but it seems far fetched reasonable consumers would pay the same for a free-standing SFR they would for half of a "duplex" or condo, but who knows for sure.Either way you look at it you're in a residential appraisal situation on the comparable sales approach....4 unit buildings are still "single family" homes. You could do some modeling and find outcomes on properties where someone has actually pulled this off to calculate possible appraised value....you can also run data in aggregate and like at the only 2 constants for this property type, which is price per sq.ft. and price per unit.Good topic.

Brandon Sturgill · Answer

No worries @Scott Lewis best of luck going forward on this one. keep me posted if I can be of further help.

Scott Lewis · Answer

@Brandon Sturgill All excellent points! I really appreciate your insight and input as always. There appeared to be an arbitrage opportunity between the current price per foot of $84 and what townhomes in the area are selling for, currently around $130-150 per foot. If I end up moving forward with the deal I will certainly take your advice of connecting with a local architect to understand all of the nuances to gauge if there's any validity to the idea.

Nik Moushon · Answer

@Scott LewisOdds are it wont be possible. You'd have to be pretty lucky with just zoning for you to convert it. Not to mention the huge amount of costs that would come with converting it. Main points:Zoning would have to allow for townhomes. Townhomes are different than a MF.The design and construction of the building would have to allow for easy conversion without a complete gut and re-build of interior. Think 2-hr fire walls between units and/or adding sprinkler systems in every unit.Let's assume you can convert it, then you have to hope the zoning has lot width requirements that are the same width as your townhomes. Odds are the most you could do is convert it to condos. And even then there would be a lot of cost involved. fire walls and sprinkler systems.

Scott Lewis · Answer

@Nik Moushon Thanks for the feedback. Those are all very good points I hadn't considered. I am most certainly thinking this was wishful thinking on my part at this point.