Renovation of Downtown Property

[Ashley White]

Hey all!

I'm very new to real estate investing, but have made my first deal a little over a year ago.

Back story:

I was able to snag a seller financing deal with no interest and would allow me to purchase a 2 story building in the downtown of a small city where I grew up.  I got the building for a steal, but it was in VERY poor shape.  It basically has had water damage for many years that will ultimately destroy the building.  I've been trying to get funding to renovate the building, but I work full time as well and it just has not happened yet.  I own my own house as well with a mortgage and want to be careful with what else I decide to do. 

Any advice for how to get something going with this building or just reselling?  It would be a great opportunity for a small business and a multi-family loft apartments.

Thanks!!

[Jim Goebel]

Hi Ashley;

Sounds like possibly a fun project!  

Maybe financially rewarding...  However from what you're describing it also sounds like a potential 'high risk' and needs to be VERY thoughtfully managed.  If it's just sitting there and has been for awhile - on one hand, I suppose some more time is not going to kill it.  ON THE OTHER HAND, (and that's an important hand!) you have presumably some holding costs, opportunity costs associated with whatever else you could/would do with funds if you were to 'cash out' even in its current state, and of course, a vacant and decrepit structure gets worse and worse over time, and can sometimes accelerate in its decline as more time goes on...

So here's a few thoughts and questions that may help inform early decision making:

1. What's the macro story/trajectory of this 'small town'. My big picture view is that metros reach a 'critical mass' point where they can attract the 'right' kind of intellectual capital and human resources (workers etc) that build the base of a solid regional economy.  Not all or even a majority of what we'd consider small (<50,000 people) towns enjoy the right mix here that'd make ME comfortable.  But the drivers here are important to look at on a case by case - also, thinking about this and its importance depends on your vision for the property.  If you are buying and holding, the long term value of the property becomes far more important - although some places if they produce cash flow can be fine not being a 'high value/equity' type of thing, if your time horizon is long enough...
2. What's it zoned? Do you have a vision for what you think it would be in its 'best' (financial) use?  Do these currently align?
3. What background in engineering/construction/project management do you have?  What interest level do you have there?  Just want to make sure you are being realistic about your abilities.
4. Per #3, what type of network/mentor-ship do you have above?  If actively managing a project like this it will be crucial to have people you can trust.
5. Financing and time allotment: I see these as being related - if you are working full time then you will not be able to be super active in terms of managing things unless two things are true - A: you are a beast and have the requisite background to handle it, which I doubt based on what I'm reading, what I guess to be your age, and perhaps an assumption of your background.  And B: The time and flexibility with your work. ----  The reality is to really get an AGGRESSIVE (high risk/reward) project through the process, there will be times during the project where something just cannot wait and you have to pick your priorities.  Now, if A and B do not both 'check out' (my guess is that they won't) you may be stuck exploring a more traditional financing and find an outside resource to manage type of route.  On that subject.......  Here are my thoughts and things to consider below........

First, consider getting some plans drafted up.  You can perhaps hire out a CAD tech.  If you know CAD or can teach yourself CAD, do it yourself.  These need to be of a reasonable Arch/Engineering Quality.

I suspect that you multiple options for 'outs' with a project like this.  Here they are:

1. sell in its current shape (probably expect to do same, worse, or a little better than you paid)
2. sell in its current shape with CAD plans and a vision for what the place will be, with some thought on the development side (probably some volatility here but the idea would you'd position yourself to do much better than #1)
3. Do the development to get the 'shell' solid, water tight, and leave the systems/final build-out to a developer that has more experience/time/capital to execute down the stretch with the rest of the Engineering, tenant readiness, or whatever (higher risk that 1 and 2, with most of that risk being from what you've described on the structural side of things) - There'd be some real money here, to get here and I wouldn't be 100% confident you'd get your money back.  From my experience, the developer/owner that gets to the FINISH line is the one that gets to really reap the rewards.
4. Do the development all the way through.  This may break down into the following BIG PICTURE steps:
   1. Do the front end loading, CAD plans, get secure financing lined up (if you can)
   2. Tackle the higher risk construction parts FIRST including from what you've described, the roof repair, the joists and other structural stuff.  If that gets off track or you need to punt the project, you want to know that BEFORE sinking in a lot more money
   3. Perhaps think about phasing some build-out to live in a portion of the structure if you are in the area/have the interest, also depending on your money/financing picture
   4. Kick butt on the rest of the renovations

Sounds like a fun challenge but you also want to be aware of your limitations.

Jim