old home (poorly) converted to duplex - fix up or make do?

Question

I own a 115 year old house that was converted into a duplex when a 2nd unit was added upstairs in the 90s. It was not done well, there is a hodgepodge of 'handyman/diy" work throughout, and I'm trying to decide if we fix it up right or just make do until we sell in 10-15 years.

The two units are ~3bd, 1ba and about 950 SQFT each, with less than ideal layout but otherwise are ok cosmetically, and the property is fairly large and has a nice yard for the area (South Seattle near Light Rail). Our neighborhood is historically low income, but is quickly gentrifying, with several new mid-rise apartment complexes, townhomes, and fancy new SFH construction.

I have been able to get good rents with great Section 8 tenants, and have about 1,250 k/mo left over after PTTI, Vacancy, yard maintenance, WSG and other expenses and reserves. I don't need cash flow in the medium term, and have money to tackle some of the fundamental issues. I just don't know if it is worth it.

Is it likely I will recoup any investment to address some of the fundamental issues (raise sagging floors in the lower unit plus addressing issues that will cause in the upper unit when the walls raise 1-2", replace galvanized piping, re-do the poorly done roof) when we look to sell in 10-15 years? Or does it make sense to just address the items that will cause ongoing maintenance headaches or lower the quality of living for the tenants, but leave the 'bones' of the house as-is?

My best guess is an investor wouldn't care that much - it's rentable as-is, and a owner-occupier wouldn't want to live in a 950 sqft 3bd 1ba and would just tear it down.

Sherief Elbassuoni · Answer

@Chester Knapp, if it is rentable as is, and gets you good cash flow, you can skip doing all of this rehab work since this is gonna cost you a fortune.

An exception would be if neighboring units around your property are very expensive and in pretty good condition. In this case, you can consider doing the rehab work, then do a cash-out refinance and use the money you pull out of the deal in paying yourself back for rehab money and down payment for another property or so.

It all depends on the numbers!

Brian Hughes · Answer

You are in my stomping grounds  (rainier / beacon area)

I had a similar conundrum on a 1900 built duplex in georgetown,  seattle.   It was in pretty good shape overall for its age having had various updates through the years,  but in a perfect world it was going to need work to correct awful floor plan (made by combining two small main floor units into a larger one) and the roof was going to need replacing in 5 years,  and it needed some other upgrades and modernizing if I was going to keep it longer.   There was also the issue of ever expanding landlord regulations in seattle,   and I have pretty much decided to gradually phase out my seattle portfolio.

If the building was in a stable neighborhood it could have made sense to do the work it needed,   but given various circumstances including negative trend of that area of the neighborhood  (street camping and constant low level property crime) and townhouses replacing many homes in the area meaning the structure was worth zero and the dirt was worth everything,   it didn't really make sense to invest a lot in the existing building.

Basically it was "economically and functionally obsolete"

So with your house,  the main question is if you are going to spend 50-100k on major renovations,  will the home at the end of  your planned hold time still be economically viable as a single family or duplex?   If its on an arterial or in a LR zone or urban village,  probably not.   If it is "single family" zoned (ironic quotes) and in an area of similar,   it could make more sense to invest the work in it.

In my case I sold the duplex in georgetown  (exactly 10 years to the day after purchasing it) to a townhouse developer who owned an adjacent lot,   making my lot worth more to them than other developers.   Independently of the sale I bought a new mid century daylight basement rambler in upper rainier beach,   and have to date dumped about 70K in renovations into it.   The sale proceeds from the georgetown duplex (which was paid off) have now been reinvested in a 7 unit property in Everett,  WA.

Bruce Woodruff · Answer

It's the old conundrum.....you spend money, you make more money later.....

You save now, you pay for it later....probably a lot more.

If you're intending to pass this on to the next buyer, good luck. They'll have it inspected and it'll get caught and they'll ask for a reduction in price.

I don't know what I'd do.........

Chester Knapp · Answer

Account Closed @Theresa Harris - That was my approach since we bought 5 years ago and needed to built up reserves.  My main issue is I'm now facing necessary replacements for large items that can no longer be repaired (back deck, portions of our front porch, wiring we discovered was unsafe, joists separating from the headers).  Its at the point where costs are halfway to a full rehab, and I can save some by doing it now.  Otherwise I'll end up re-doing some of the work if I rehab later.

Account Closed · Answer

Don't make repairs you don't have to make. Take any money you have now, invest the money into something that makes more money and then you will have even more money, later.

I own several apartment buildings that are long over-due for new roofs, but I keep patching the roofs with tar and that white gooey silicone. If I can get 5 or 10 more years out of a roof, then that means when I do finally get a new roof that roof will carry me on into several more years. I could give in and but the3 roofs I need and I think my cost will be about $80,000 + $15,000 + 60,000 = $155,000. I would rather have that $155,000 in my account for as long as possible just in case i find something to invest in and I could be $155,000 short of having the down payment.

Eventually, I will get the new roofs. Maybe, next year because the last time I tented the 3 properties for termites was about 20 years ago and they are long over-due to get tented again. The problem I have with getting the properties tented is I don't trust the termite extermination companies because it is my understanding that 1 bottle of the gas they fumigate with costs more than $2400 and I think they cheat on the gas. i had one property termited and when I was remodeling an apartment about 3 months later there was thousands of live termites in the 2 x 4 walls. The termite company told me the gas killed the live termites, but did not kill the eggs and I don't know if that is a crock of b.s. but that fumigation was done in 2004 and exactly where the live termites were after the building was fumigates is where my major problems are now. So, what good does it do to fumigate a large apartment building if the termites are technically never killed as in my case.

The next time I get a property termited I think I will hide jars with bugs in them to see if they are dead when the job is completed. Then, the termite company I used complained several times and told me our government doesn't let them use gas that is strong enough. So, maybe they are giving the termites an oxygen infusion.

My long story reminds me of our pest control company that sprays all our apartment buildings and office every single month. The problem with that company is every month the roaches are never dead and they grow larger and larger. I always ask their technician whether he is using chemicals to kill the roaches or feeding them vitamins.

Chester Knapp · Answer

@Jason Johnson - given the nature of the building on our lot, the long term appreciation will mostly be in the land.  Since any renovations are unlikely to add value to the property, based on this discussion and thinking it through, I'm going to calculate ROI based on a 15 year holding period, looking at what reduces maintenance, risk, and helps keep rents at the level I want.

Jason Johnson · Answer

Chester, Do you think the future appreciation is in the land or reno of the building?  If the building is destined to be scraped off the lot to get highest and best use, I'd be very picky on midterm improvements.

Chester Knapp · Answer

@Jason Johnson - for this property long term appreciation matters the most.  The goal was to house-hack ourselves into a property that could pay for it's own upkeep, while the area gentrified around us.

Jason Johnson · Answer

@Chester Knapp what investment metric matters most to you?  Your setting on some nice capital appreciation!

Brian Hughes · Answer

@Chester Knapp  I can't really develop an opinion on your duplex without looking at it.    Yes,  doing systems work and stuff beyond paint/floors/trim sort of cosmetics can get expensive fast,  but so can a roof or plumbing leak or electrical fire.    (I had the latter in everett property 1 week after buying it,  so these things can and do happen)    I am a strong proponent though of keeping properties in good shape.  That doesn't mean they have to be perfect and new and totally modernized,   but they should be in good solid, safe and functional condition for what they are.    Making constant patch-up and quickie repairs ultimately invites disaster,  or results in property falling into 'handyman special' condition territory.   My recently purchased everett property is a great example of that.

Adding a detached unit like an ADU could be very expensive (300-500/sf),  but depending on the layout of the lot maybe you can just subdivide the lot and sell off the piece(s) to developers.   Then use those funds to update the duplex.    Only issue is if you want to sell while construction is going on it might deter a lot of buyers (and renters)The duplex I sold IF I had decided to keep it I probably would have looked at converting it back to a triplex (its configuration probably from about WW2 through early 2000's)  - I would have needed to basically replace a couple walls,   modernize the heating system,   add a third and maybe 4th common electric meter,  and find somewhere (probably a shed) for a common W/D and locate a 3rd/4th water heater.    The house already had updated plumbing and electrical,   modern windows and (asbestos,  but in good shape) siding.   It also had a modern foundation that had been retrofit probably in the early 2000s.   So it had a lot going for it given its age,   but aforementioned local neighborhood issues,  hostile regulations,  and other circumstances meant I decided it was best to move on.   FWIW in late 2018 I got 700K for it.   That was off market so no commission.    The highest priced recent lot sale in the immediate area at the time was 740k,   but things had cooled a bit since that had occurred so I figured I did OK.    The current owner is still renting it,   but they are almost done with their other project in that area,  meaning its probably next go go under the bulldozer unless they try to flip it for more than I took for it which given how long theyve held it now might work for a modest gain.

old home (poorly) converted to duplex - fix up or make do?

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