125 year old house reno estimate?

Question

Hi all, There's a 125 year old MF property that I have my eye on, but it needs upgrades (roofing, electrical is very old, mechanical is ad hoc, asbestos mitigation, etc.). I'd also like to split a unit and add a unit if it improves the ROI.

1. How do I go about getting a cost estimate for this type of rehab / such an old building? Can this be done on general cost per SF only? Or is it necessary to walk through with a structural and MEP engineer and a contractor before putting numbers together?

2. I feel uncomfortable asking to walk the property with a contractor because I don't have an established relationship with a contractor, am not confident the deal will pencil without the rehab estimate, and would need the owner to approve the walkthrough even though some units are occupied.

3. When I visited the property, my (investor-experienced) agent gave me some rent estimates for the property's units, but they seemed really high to me and seem out of line from what I've seen the market absorb. Any tips on this? How should I balance / evaluate this?

Thanks in advance!

Kevin Sobilo · Answer

@Jay Lutz, "make it work then make it work better".

Underwriting this deal with a rehab that involves adding a unit might be unnecessary. Does the deal make sense if you don't add a unit? If so, underwrite it that way and then after you buy it and have a contractor consider changing the plan to add a unit if that makes more sense.

The issue of adding a unit isn't all about construction costs, you need to investigate zoning and building requirements as well. For example, zoning might require a larger lot sizes for more units, or more offstreet parking than you can provide, or building codes might require the building be upgraded to have a very expensive sprinkler system if you add a unit.

With regard to rehab estimates I do my own without any contractors before purchasing. I make an estimate for each part of the rehab and then also estimate how certain I am about that estimate. That allows me to generate a high and low estimates for each aspect of my overall rehab plan.

Example:

Task       Estimate      Confidence    Low      High

Demo     $2,000          90%               $1,800   $2,200

Roof       $10,000        80%               $8,000    $12,000

Electric  $5,000          90%               $4,500     $5,500

Misc        $5,000        100%               $5,000    $5,000

------------------------------------------------------------------

TOTALS  $22,000                               $19,300  $24,700

So, when you total everything up you have your estimate and also a low and high. If everything does as badly as you could expect which should never happen you end up at the high estimate. As long as you are honest with yourself about how sure you are about your estimates you should be able to use project management skills to bring the project in near to the estimate you planned.

Jay Lutz · Answer

Thanks, Bonnie :) You make some good points.  It's probably best to take a step back and see if there's something more manageable and profitable rather than keep trying to work out this puzzle. It's in a great location and sat on the market for a year, and has the benefit of an extra lot and the transitional zoning, which is hard to find. But maybe timing isn't right on either side.

Thank you for suggesting owner financing. Hadn't thought of that and will keep it in mind as an option for this or other opportunities.

Bonnie Low · Answer

This is a very complicated project and it sounds like it may be your first one. I'd be hesitant to take this on given the numbers you're talking about, lack of relationships with local contractors and the extensive nature of what needs to be done and what you want to do to add value. If you were getting it significantly below market value, that's a different story, but it sounds like you're not. So why this property? Old houses have many unknowns and always go over budget. You absolutely need to walk the property with a contractor and/or get an inspector out there so you know what you're dealing with. And you're wise to point out that you don't have a track record so it may be difficult to get bank financing. You're probably looking at hard money for a project like this, or private money. But I just keep circling back to what is the long term plan? Why this particular property? Since the owner owns it free and clear is seller financing an option? You need to get something out of this deal for the amount of risk you're considering taking on.

Just some food for thought.

Jay Lutz · Answer

Thanks Kevin Sobilo! I hadn't thought about making a high and low estimate. Seems like a great way to get a range and some confidence in the cost! Any tips on sizing wiggle room for any unforeseen surprises on a property like this?

The deal does not pencil out as-is. It's in a growing city, so the numbers are tight without adding rentable SF. From what I've seen, everyone is buying for appreciation only: properties rarely meet the 1% rule -- more reach 0.6% or so. STR isn't allowed. If I rent the rooms MTR, I'd still be short $1600/mo (0.85%).

The property has a cottage, split into a micro studio and a one bedroom, and a 3/2 house with a semi-finished, stair-accessible, windowed, empty attic 75% the size of the house. It's been rezoned to allow a live/work component, allows 4 units, and the FAR allows room for plenty of additional SF.

The idea is to split the huge kitchen in the big house and divide the house into a 1/1 and a 2/1 and slip the additional unit in the unused attic. Plumbing can be pulled up and stacked. OR maybe the attic could just make for 2 or 3 additional bedrooms.  Definitely less investment. But then we've got a 5/2 or a 6/2 house that's harder to rent.

Alternatively, the attic could be used as "office" space or storage, since there's an exterior stairway to it already, too. No clue where to find comps for this sort of offering though. Maybe renting this out this way would make the deal pencil on its own though... I'll take a second look. Thanks for the tip!

It's in a location with million dollar homes and small businesses, so the price they're asking isn't cheap. (Owner got it from his parents for $1, so has nothing is owned on it.) Asking price could be the ARV, but not pre-rehab. So I'd have to offer 60% of asking and have no clue how to do that confidently.

The property also comes with an additional, empty lot (there are a few sheds on it). Would have to figure out how to split that off again to build on it, but it'll allow additional units if split off. Or we could sell it to fund the rehab. Building on the extra lot makes the numbers work for the whole deal, from the cost per SF new construction I've seen floating around.

I don't have other properties I've flipped or upgraded to give the banks confidence for financing.