Full apartment complex reno... is that a bad idea?

Question

Hey everybody! So I'm new but I've been looking at properties in Seattle, especially in Belltown. There's an apartment complex that I want to keep my eye on for the coming years... but a question popped into my head when I was thinking about the possibilities.

THE PROPERTY: It was built in the 1920's and from the outside its a beautiful, ornate brick building but the inside looks like it smells of cat pee from the 70's. I looked up reviews and most of the tenants stay there because of the price ($950 for a studio), but they move out as soon as they can afford more because of bad management, low-level tenants, and poor upkeep of the property. It's a great location, I want to live there! Its the perfect balance of downtown, the cool vibe of Belltown, easy distance to the market/blocks from the waterfront, and you could watch the NYE fireworks from the roof... if the roof were safe to walk on. After doing some digging, I discovered that its been owned by a single person for about 20 years and that person might be tired of it soon and want to pass it on to a younger guy like me!

I did some guesstimate calculations on what I think the building currently makes and what is possible for cash flow after renovations. There's a lot of guess work because I'm not sure of all the details, like how much each individual unit is renting for, but I used the BP rental calculator to do the work, and I think that I was pretty conservative in my ARV estimates. Right now, they must be loosing money or just getting by... After renovations it cash flows pretty darn well at an average Belltown rent price. But it needs major renovations! I would want to keep the integrity of the 1920's building, but the lobby and hallways are out of a horror movie and the kitchens and bathrooms look like they're falling apart... and they could definitely use an upgrade on technology.

MY QUESTION: How would you handle a full gut job on an old 35 unit property like this, especially when it comes to tenants? Do you go unit by unit? What if you open that first vacant unit and realize all of the pipes and electrical needs to be redone and you have asbestos running throughout the place? Do you evict everyone and close down for a while, reno, and then a grand reopen? Wouldn't that destroy your reputation/displace a ton of people and make them extremely unhappy? I love the idea of the business opportunity, but I'm also a nice guy who cares about people and knows what its like to struggle with housing... but I'm really interested if there's a more proper etiquette on how to handle this, because this seems like a wonderful niche for myself down the road.

Casey DeCaire · Answer

Thanks @Joe Fairless! Very good to know, I suppose it really is about the team you put together. Surround yourself with people who have the knowledge and skills you are lacking for your vision, just like Henry Ford did. And this definitely isn't a tomorrow thing, I need to build up to this one, maybe as my version of Year 5 in "7 Years to 7 Figure Wealth." Except this place is currently assessed at being worth 7.7 million... with other similar sized, but newer complexes on the same street, just blocks away, being valued around 12 million.I think its going to take a while getting used to that kind of price tag! I'm from Northern Michigan where the expensive houses with beach front or lake access property are worth maybe $120,000. But the median home price in Seattle is currently $507,000. I keep on telling myself that they're just numbers, and even though they're bigger the math is the same... just to ease my anxiety a bit! Haha I'm sure it will all start coming together once I get my hands on that first deal, thanks for the advice! I'm going to a Meet-up tonight, so maybe I'll use it as a conversation starter there.

Casey DeCaire · Answer

Hey @Alex Chin I am kind of using this as analyzing practice. I've narrowed down my focus to working on wholesaling for the moment, and have some great people that I met at the PacificNW Real Estate Meet Up last night to give me some awesome guidance! But this topic is like my fun time... and what I'm interested in doing down the road. There's a lot about this property that I don't know... all the info I gathered was from rental sites to see what they're renting for, the assessors website for tax info, and I looked up the LLC that the property is under to see what kind of owner I would be working with. I'm not sure of the actual number of units, as I'm not sure where to find that, just guessing from the building size and windows lol... and you never know, that could be 35 studios since it used to be a hotel or maybe its a mix of 25 different size units that they made when they converted it to an apartment building. And since it was built in the 1920's it could be under watch by the King County Historical Preservation Program... so there's that hurdle, but they would probably welcome someone who wants to restore it to its former glory. Definitely something I'm going to keep my eye on! And you never know, this might be my niche because I've already seen a few other low rent, run down buildings in Belltown just like this one and Seattle seems to want to keep all of the beautiful historic buildings alive... so I could probably get some backers once I get some experience under my belt to show that I can do it. Who knows, maybe I could get a show on HGTV like that lady who restores historic houses in Detroit! haha@Kara Haney I haven't been inside the building yet... it just looks nasty, and they are known for being a very pet friendly complex in Belltown. But from the pictures, they seem to have the original wood floors in the units. I would definitely want to keep those. Its the community areas that look the worst! Trust me, in my guesstimates I made a ton of room for extras!Hey Joe Bertolino I welcome the negative view point, sometimes I need people to bring me down from my high flying cloud of optimism! It would definitely be property in which I would need some partners or investors with some really big deep pockets to provide a good amount of the money or at least cash for the renovations because seller financing may be a definite option. I may not have a lot money or equity at the moment, but I do love a challenge and project to work on.... its something I'm going to work towards for the future.

Joe Bertolino · Answer

It is a bad idea unless you have a whole lot of money sitting around and you love a challenge. Not trying to be negative, but there is a reason why the current owner is just sitting on it. You rarely see these types of projects done without a TON of redevelopment agency funds involved because the projects don't pencil out on their own.

Kara Haney · Answer

getting rid of urine smells can cost a lot - budget it in and ask questions - it may mean laying new floors not just taking out carpet.

Alex Chin · Answer

@Casey DeCaire $7.7m for 35 units? $220,000/unit for Belltown is a real solid starting point. I think that it would need to get negotiated down a bit, but what with continued appreciation, you could potentially see really good returns on exit.I know you're only talking about possibly buying-holding for yourself, but this is the kind of opportunity that high-end syndicates start perking their ears up at.

Joe Fairless · Answer

@casey @Casey DeCaire follow the lead, my friend, and see where it takes you.

Joe Fairless · Answer

@Casey DeCairefirst off, great vision and ambition! Now, my more important comment, definitely do not undertake this unless you have an experienced local team that has done major renovations. My first step would be to speak to local mgmt companies and contractors about their renovation business and then find one you trust that has good experience and talk to them about this opportunity. Most, if not all, of your questions you asked in the post will be addressed by that meeting.