Abandoned building in transitional neighborhood - quality?

Question

There's a neighborhood in my city that the local and regional players have been trying to push as the next "hot spot" for artists and young professionals for a few years. It looks like they're finally getting some traction and I finally have an opportunity to buy for cheap.

These units need rehabbing. The question is, should we go for higher-end or do basic, no-frills remodeling? My competition looks like no more than $700/mo, and an average of $550/mo for a basic no-frills renovated 2-bdrm. The building purchase (for a 4 unit) is about $40k, renos about $40k and it should have NOI of more than $14k when finished. Taxes are absurdly low.

I am also concerned about the competitiveness of the rental given the relatively high vacancy in this market. I'll be competing against singles and doubles with ample parking. When I was a renter, no off-street parking was an absolute dealbreaker so I'm concerned about not being able to attract a quality tenant if I can't offer any parking. This is an urban neighborhood with bus feeder lines to the train but in Cleveland you either have to be broke or trying very hard to live by example if you don't own a car. Any thoughts on this one?

Christian Carson · Answer

I met the owner today. He's definitely a textbook slumlord, complete with the awful car he uses to pick up the rent! The way he talked about his maintenance schedule and his tenants was disturbing, but he was not wrong about how well the previous owner had updated the buildings. A lot of people are reall down on this neighborhood, and I'm not sure if I want to be a slumlord right now.

I'm wondering what happens if I update these units with nice stuff and can't find a nice tenant. I guess I have to do a craigslist test ad to see what happens. The trouble is whether the people responding have any intention of ever paying the rent.

John Mireles · Answer

I purchased a property five years ago that's in an "up and coming" neighborhood. Close to downtown, the ballpark, trolley line one block away etc. Right now though, it's still a long way from becoming the hip place I expect it will be in the next five to ten years. My building unfortunately has no parking.

But the way I keep it filled is by offering a premium space. The same apartment a mile away would go for $500 to $700 more per month. I get good tenants who either want a more urban experience or don't want to spend the extra money.

My suggestion to you is to make the units as high-end and middle class as possible. The only way the area is going to increase in value is if you bring the yuppie crowd in. You should be a part of that change. If you appeal to a poor demographic, then you're shooting yourself in the foot.

And by the way, appreciation can happen. My building was recently appraised by the bank for $500k over the purchase price. I won't really believe any of that until I actually sell it - that day is a long way off still - but it's nice to know that my bet is paying off.

Christian Carson · Answer

Two out of the three buildings are adjacent to each other, and there is a bus stop right out front. They have adjacent driveways that might be convertible into some offstreet parking if we took down the fence between them, but that means I'd have to buy both of them.

The third building has a grassy area behind it that might serve as a parking lot.

Parking is not a problem in this neighborhood currently, and I don't think the city has an overnight street parking ban. However, if we have learned lessons from other resurging Cleveland neighborhoods, car break-ins and grand theft run high in these urban neighborhoods where people rely on street parking.

Good points, Bill and Suzie. You've got to get in on the ground floor if you want to make any money. :)

Suzie B. · Answer

You might do ok w/o parking if you offer nicer units at a competitive price.  It might do you well to find out if there are any garages in the area, walking distance or short bus ride, that would be available for people to rent spaces for their cars and see if you can work with the garage for a discount for your tenants if they would like to use the service.

Bill Gulley · Answer

I'd say off street parking would be a must for me to consider anything.

You're really looking for forced appreciation here as the area changes to a more desirable area. How quickly that will happen is the question. You need to get them cheap before prices begin to rise, but as prices rise, so will rents. Your property needs to have possibilities, by that I mean room to grow, say a patio  graden, it needs character, charm, style, this needs to be in the bones and design, IMO as you can rehab and update as the market changes over time. Look for functional traffic ways in the floor plan, no walking throug a bedroom to get to a bathroom. Your analysis needs to consider the future with growth but yet initially to cover the investment. If the powers to be are pushing the area, it's a matter of time as it will likely happen if they are heavy hitters, run with them, not against them. :)