Do I continue rehab or attempt to redevelop property?

Question

I have been fixing up a duplex in Lakewood for the past year or so and as more hidden issues arise, I am beginning to wonder if it's worth dumping more money into or planning our exit. My background is in residential subdivision construction and entitlements so I am not as savvy on vertical construction budgeting / running profs as I would like to be.

I have two options I am considering, the 2nd option is what I'm seeking guidance on:

1) See the renovation through to the end and using it as a long term rental -- I don't think it will net much profit reselling down the line due to the cost of major renovations that would be necessary prior to reselling

2) Subdividing into 2 duplex lots and entitling the property to either sell to a developer / develop myself. I would appreciate any guidance on how to find comps for entitled, development ready land or finding a partner to develop the property with. Please note that the lot is large enough to legally subdivide into 2 lots, is allowed by zoning, and a majority of entitlements could be ran through my engineering firm making it relatively cost effective.

Thank you in advance!!

Bill S. · Answer

@Erich Dellinger so the start is to see what the units that would be built on the property would sell for. Say $600K per side for discussion. That gives you $2.4M (4 units at $600K each) as a sale price. The land is worth roughly 20-25% of the after development property value (higher after development values allow for higher land percentages all other things being equal). In this example, your land would be work for development if you could let it go for between $480-$600K. If you are into it for more than $600K you should either suck it up and finish the reno or sell and cut your losses.

Now a word of advise on renovations. No one buying a pre 1950s building that has not been completely gutted and remodeled should know that if you turn the wrong contractor loose on the property you would end up a completely gutted and remodeled building. It's not clear what your level of experience is with remodeling. What I have seen with older buildings and newer investors is the tenancy to fix/replace everything. In many cases for a rental property, well done cosmetic updates are more than adequate. There is no reason to bring a 100 yr old building up to current building code. If there are structural defects but the property is not going to fall down reconsider your renovation plan and hold off on repairing. My advise, update cosmetics and rent on.

Tom S. · Answer

I recently finished a multi year renovation on a 4 plex that I bought in 2016. What an absolute nightmare. It seemed like everything that could go wrong, did go wrong. It was not my first time do reno work, but first time on a multi family. At times it stressed me out so bad that I wanted to just say fuck it and list it. I knew when I bought it, it was going to be tough, but it was ridiculous. I mean, asbestos, mold, rodent infestation, animal feces, human waste, a hoarder, illegal aliens, bad plumbing, the electrical was shot, drainage problems, warrants for tenants, regular police contact, found stolen property stashed, drugs, needles, tenants on the run from the police and not paying rent, one died while on the run, domestic disputes with another tenant, a illegal grow room, permitting issues, contractor problems. Cost overruns were really one of the least of my problems. I could go on. I stuck it out, finished up finally and rented the last unit a few weeks ago. My situation does differ a bit from yours, I knew that I had an ok property based on the appreciation we were seeing. The cash flow is absolutely amazing on this unit. Without a bit more info on your property, ie location, costs, rents, and types of work needed, it is really hard to give an opinion. I can just give you some insight on what I ended up doing. It was hard, but worth it in the long run. I realized early on that real estate investing isn't always about the short game, this isn't HGTV, its about the long game. You may have a gem and not even know it because of the hassle. I thought my gem was a big ole steaming pile at first. One caveat. Sometimes cutting losses is the best route. If by dumping it now you lose, lets just say, 5k as opposed to 15k, then yeah. Dump it. Its surprising to hear that a multifamily in the Denver or even metro area won't give you a return. Tearing it down and sub dividing sounds extreme. I would be happy to share my experience with you.

edit: spelling

Erich Dellinger · Answer

Thanks for the replies gentlemen!

Given the nature of the lot --  around 100' of frontage, ~ 250' of depth, with the existing structure more or less centered at the frontage, I believe the existing structure would need to be torn down to subdivide. I think speaking with a developer would be my best route as price paid for raw land will be different than price paid for a fully entitled, ready to build piece of land.

The renovation is just turning up more demons (A LOT MORE) than what was originally budgeted for so I am reevaluating whether pumping even more money into something that would require major expenditures prior to ever reselling is worth it or if I'm better off using the zoning / large lot to my advantage and either partnering with someone to develop or entitling the property and selling the project to a developer.

Scott P. · Answer

Hi Erich,  If I understand correctly, you would finish the renovations on the existing duplex and you could also subdivide so that a 2nd duplex could be build on the same lot - which would then have become 2 smaller lots?

The alternative plan would be to sell the existing duplex and the large lot maybe before finishing the reno?

If I understand this correctly then what I would do would come down to dollars.  If i was out of $ and full of headaches and hearaches perhaps I'd sell the reno uncomplete but I'd avoid that if possible.  If I could swing the money to finish the reno and pay the various fees to subdivide that is what I'd do.  As you know w/your background, zoning seems to only get tougher, not easier.  I'd do the subdivide while I can.

I'd try then to sell the 2nd lot to recoup some $ if I needed the $ now unless I had enough $ to finish the reno without selling the 2nd lot in which case I'd sit on the 2nd lot for future use when I had more $.  If I had enough $ to finish the reno and build a 2nd duplex I'd do that too because the sooner I build it the sooner I could rent it and the sooner I'd start building equity.

With all that said, I'd err on the side of caution if it were me.  YMMV

Armand Wolfe · Answer

Could you do both?  I think you can investigate #2 to some extent on your own by researching similar projects in the area.  Zillow, County Assessor, etc.  You will get some sense of the economics (price paid for lots and sold prices of competed projects).  You can also find the developers who did those projects and talk to them.

Do I continue rehab or attempt to redevelop property?

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