Advice on run-down 11-unit multifamily in affluent area

[Devin Marlowe]

Hi everyone. 

I am new to the forum but I've been putting in a lot of time going through the posts and learning as much as I can about real estate investing. 

Ive been looking at a property close to where I live here in Victoria. Its a bit of a unique case, and being that I'm new to this I'd really like the opinion from some more experienced investors. 

The property is located in a high-end part of town, in a heritage residential area about 3 blocks from the edge of the downtown core. Other houses around it are immaculate and of the same era, a very affluent community. This house is larger than most and is frankly an eye-sore. Overgrown garden, broken down cars in the driveway, garbage bags being used as window-blinds.  
It is listed on mls for $750,000. The average single-family home price in Victoria was $700,000 in 2014. 
Built in 1910, the house is 5500 square feet, a grand old mansion that has been converted into 10 units. The units are tiny, many of them sharing a bathroom. The tenants are all very low income but being that there are 10 units in the house, and a detached carriage house means the property nets $6100/month. 

A building inspector from the city looked at the property and mandated that basement suites, two one-bedroom units, be divided by a firewall and had their ceilings fireproofed as well. I would, over time, update the suites and repair the building to restore is former glory. 

I am a recent grad with an urban planning degree, but that means Im lacking the capital for a down large downpayment and therefor creative financing is my only option, and the owner has agreed to $100,000 in vendor financing which would have to be met with a traditional mortgage and secondary private funding. 

I would really like some experienced opinions on whether or not this would be a worthwhile undertaking. I realize going into such a large property without a substantial downpayment is risky, but I think the property has a ton of potential and I read somewhere that history favours the bold. 

Thanks very much BP, this community is incredible. 

[Roy N.]

@Devin Marlowe 

I'm guessing this house is in James Bay (not Oak Bay).  I lived not far from there years ago when I sailed out of Esquimalt. 

Sounds like it is more or less a rooming house.  A rooming house works well when near a university as you can furnish them and cater to international students - but when your clientele are affordable housing patrons, you stand to have far more drama and administration than you care.

If it is the property I found on MLS, the listing indicates the owner has carried out decades worth of renovations without permits. It also states the property is licensed for 8-units (1 1-bdrm and 7 x light housekeeping), but is operating with the configuration you presented at the top of the thread.

These are two large flags that may make this a steep challenge for a first rental property.   Given these disclosures directly in the ICX listing, I would guess a) the property has been on the market for some time {and will continue to be on the market for more time} and b) someone else has looked at the property and, based on their findings, the Vendor had to disclose the non-permitted renovations.

In analysing this property, I would do the following:

1) until there is a written assurance from the City that the current operating licence can be amended to reflect the actual use of the property, I would evaluate the property with the revenue from only the 8 licensed units.

2) get in writing from the City inspectors what work-orders are outstanding on the property and/or what work they will require to be completed when the property changes hands;

3) find out how many days the property has been on the market and how much interest there has been  to-date.  If you are using a buyers agent, s/he will be able to do this for you.  If you are not using a buyer agent, but are going through the Vendor's/listing agent, I would suggest you get your own agent as the Vendor's agent is primarily committed to the interests of the vendor.

Based upon the answers to the three points above, combined with the disclosure that all past work by the Vendor has been performed w/o permits, I am guessing the NOI thrown off will not come close to supporting the ask price ... maybe not even a price of $500 - $550K. If would also check to see if the Vendor is prepared to do a full carry on the property - this gives you the space to make a lower offer and for the Vendor to earn closer to the same amount through deferring capital gains and interest income on the note they will issue to you.

If your plan is to proceed with the property as it presently operates, you will want to secure assurances from the City that they will amend the current licence to reflect actual operations.   This would leave you with a property with decades worth of surprises lurking in the walls from the non-permitted and non-inspected renovations.  You may have problems obtaining reasonable insurance on such a building.

Another alternative, and likely the approach I would take if I were able to turn the present situation into an actual deal,  would be to determine if the building could be reconfigured to have 4-6 2-bdrm & 1-bdrm units and perform a deep retrofit of the entire building while it was being reconfigured .... I say this on the hunch that most of the current owners renovations are not compliant with current building or fire codes and that we always endeavour to make our old buildings as energy efficient as practical.   The downside is this will take money ... likely a lot of money.

I would suggest that to tackle this property, you will need a partner - or partners - with capital - which will be difficult to secure without a track record.