Convert fourplex to townhomes??

[Scott Lewis]

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]

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 ways

2- 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.