Current Boarding House

[Wade Garrett]

I own a fourplex in a working class town in New Jersey, which has been a home run investment. I love owning it, it cash flows, and has appreicated A LOT since I bought it four years ago. And I have been looking to expand.

A new deal just came on the market on the SAME block as my current rental. The entire deal is a 2BR, 1 Bath house.... plus a 3-story apartment building: First floor is 2 four bedroom apartments. Second floor, 12 bedrooms. Third floor, 13 bedrooms. I know the area, have good contractors closeby. And I know the rental pool. I would be happy to expand in the same town.

The kicker(s) are.... only two bathrooms on the second and third floors each, which means it is currently used as a boarding house. To boot, I checked the sex offender registry, and one of the two sex offenders in town currently lives in the building. So the initial situation has A LOT of hair on it.

My idea is to buy it, convert 4-6 of the bedooms into bathrooms, and turn floors two and three into 8-10 2 and 3 BR apartments, and boot all the transients. I talked to my plumber, and we think we can pull off the renovations for ~ $200k. If fully stabilized after that, the NOI is quite strong, BEFORE I begin to reduce utility expenses. And there are a lot of places to improve inefficient utility expenses.

My issue is carrying the place as a boarding house while I go on with my renovations. I have a two year horizon I envision on my renovations.

Current Details: 
Price $1.2mm (add another $200k for renovations, so $1.4mm)
Fully Rented Monthly Roll: $21,100, or $253k annualized
MY Estimation for annual Capex + Maintenance: ($52k)
Utilities currently paid by owner (annual): ($41k)
MY Estimation for vacant at 15%: ($38k)
PITI annualized: ($83k)
Net: +$39k

My Stabilized Estimate: 
Annual rent roll: $208k
Capex: ($52k)
Utilities ($20k)
Vacancy at 5% ($10k)
PITI: ($83k)
Net: +43k
On a down payment of $345k --> 12.4% ROI, with a much more stable tenant base and upside in rents and downside on utilities.

Would love to hear thoughts from anyone with similar experience. 

Thank you,
MWG.