All Forum Posts by: Chad Clark

 Permits are a necessary thing, I wouldn't argue against them.   What I do argue against it how they are applied.   For instance, there are no differences between a code for a simple thing that's just considered a standard industry practice vs a real safety concern.  Like caulking around a toilet base is a code.  I can't think of a single possible reason how that could be a safety problem.   Now I totally understand most of the electrical ones since your average "Uncle joe or Granpa Bob" has made some seriously interesting electrical jobs burn a few houses down.  

What really should happen is they should divide them up into categories of safety concern - Required code, Industry standard - recommended, but not required, and advanced-"It would be great if you went this far" type things.  There's entirely too many "stupid" codes that are required, but far from any safety concern.  It causes way too much extra cost just needing them.  

That and I don't see a point in charging a mass amount of money just to allow people to do a job correctly.  That's just punishing the good people.   It cost several thousand dollars for all of them.   That's seriously asinine.  

There's also a bridging point where it becomes an entire renovation vs a simple set of repairs.  There's no way to know where that point is.  

In your case of wanting to pull them as you go, you won't be able to, at least in Michigan, you'd have to pull a demolition permit to even take down the drywall or paneling first.  then you need the General Building permit and they will make you get an Electrical, HVAC, and Plumbing one from there and you might as well get them all at once.   Then you have to close each one out with inspections to make sure it meets current codes.   You won't be able to get the certificate of occupancy until it's all done.  Remember, if you're going this route, you'll run into a few things you might not expect, like meeting the code for insulation.  Not a tough one, but unexpected in my case.   Insulation is pretty pricey and I ran into the problem of having old 2x4 walls that didn't allow enough room to put in the required amount.   I had to add insulation to the outside of the house in the form of foam boards and put the siding back up.  The worst part is they make you get an architect to check the framing to make sure it doesn't need any more "upgrading" for the frame.  Ugh...  That's a few thousand bucks.   Handy hint, if it's an older (pre-70's) house, you'll end up doing some framing to reinforce it.   1800's houses will take a lot more.  They used a totally different way called Balloon frames to build them which aren't real fire friendly.   

If it's a duplex, there's no way to avoid using contractors since they consider it commercial.   (You can do your own if it's your own home).  I was able to do a bunch myself, but I had to have the contractors sign off on the HVAC, plumbing and electrical.  It seems framing, insulation, drywall, and carpentry don't matter.   That was my big whine, I was best at those three they required the contractors for and lousy at the rest.  So I ended up doing the jobs I wasn't that great at because my budget got screwed up because I was counting on doing the expensive stuff like electrical myself. 

There's a few other little things like a dryer vent and washer hoses were required, exhaust fans in the baths, and a couple windows were below the current code height to call the bedrooms a "bedroom".   I'd suggest just dishing out the few hundred bucks and get the books and read them if you plan to do any yourself.  Save your money on the HVAC one, it's seriously confusing and full of stuff you'll never need.  Hire someone.

Hope that helps. 

I ended up being ahead in the long run. Maybe about 120% ROI. Appraised for $260k so that's not terrible, just not what I'm used to. I kept it as a cash flow property since it now can rent out for around 2k a month. I refi'd out 100k to play with something else.

I don't think I'll go down the permit route again and stick to cosmetics.   It's a lot easier.   Way too many unexpected costs.   If I didn't have a huge profit margin, there's no way I would have came out ahead.  I can see how the flippers make money at it, but they must be cutting it really close once you consider capitol gains and all the selling fees.  

The Midwest in general is beyond silly in getting good deals. I run into properties with 300-400% ROI on a regular basis. I can't rehab them fast enough. You can't really look at the ones the realtors have since they overprice them hard trying to raise the value of stuff, but They are selling for a lot less than people think. Sub 100k is pretty common still. Rents are obscene in my area near Traverse City. 1br1ba's are pretty much a guaranteed 1k a month. I tend to go with 3b2ba's and I get about $1500 a month minimum. The fair market rents are crazy high. I hear Wisconsin is even better.

No problem, you'll really want to know since I ran into a couple of big ones.   First off, the biggest issue was I had been planning to do most of it myself.  When you go from a single family to a Duplex, it becomes "comercial" property and according to (Michigan) the local building dept, I had to hire contractors.  I was forced into hiring an electrician and plumber, the two things i was best at doing.  I tend to save the most money by being able to do my own stuff up to code.  Well, that cut my budget hard all of a sudden.  

Since it was a structural change, you need an architect or engineer to draw up plans that make sure the new changes are safe of course.  I removed a staircase so I needed to extend out the floor joists further.   Once the drywall was removed, I ended up having to strengthen the joists up to 10 inch joists as there were only 2x8's up there in between floors. 

 I also had to upgrade the fire protection between floors.  That included using Fire caulking or fire foam to seal off any air ways from the 1st floor to the second.   There needed to be fire blocking in my case as it was an old balloon frame and those have open spots in the stud cavities that go all the way up.  Any wiring that went up needed to be sealed.  Nothing you probably wouldn't do anyway, but it's a fire thing.  

Just from my own experience, if you were not going to separate the heat, electrical, or plumbing, I would do it anyway.  You won't get a better chance.  At the bare minimum, I'd run the pipes, wires, etc for later.   I ran air conditioner wiring even though this is Michigan because it would be a giant pain to ever go back and do it now.  It's not used, but it's there if I decide to use it.  I regret not remembering the upstairs apt had no washer outlet either.  I should have ran the plumbing for it even if I didn't plan to add it.  

So in all, no real tough spots other than normal aside from not knowing you were required to hire an electrician, but that's unusual anyway.   I just have worked with AC all my life so I expected to be able to save that money.  

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $125,000
Cash invested: $120,000

First try at turning a single family home into a duplex while going through the permit process for the first time. I see why people hate permits. There are an extreme amount of silly codes out there that obviously have nothing to do with safety. Red tape at it's best making things expensive.

What made you interested in investing in this type of deal?

Finding anything in the middle of COVID wasn't easy, it was the best I could find. At least the numbers work.

How did you find this deal and how did you negotiate it?

Another investor.

How did you finance this deal?

Cash

How did you add value to the deal?

Turning a single into 2 units.

Lessons learned? Challenges?

Don't get into permits unless you know what you are doing. It's a mess with commercial properties. Stick to the cosmetics. I would have set aside much more if i knew what a pain that would be.

Thanks so much for the answers.  That pretty much cleared up the majority of what I was wondering.  

Ok, I'm newish to the scene (4 single family, 1 multi) and have done the fix and flip to the point where I could build my own house at this point quite easily. I'd like to start branching off into the apartment building scene as it seems like the logical next step. I mainly have just been going the BRRR route so far.

So being new to this, I have a couple of questions since they fall into the commercial zone. 

1.   What's the top things to remember when buying one of these?   Square footage affecting price?  Utility that makes a huge difference when buying ie. sewer or something expensive if it's bad.     

2. Is there such a thing as DSCR loans or is that only smaller buildings. What type is usually used or do most people just cash buy these?

3.  Are sellers usually just trying to cash in or are they retiring?   I see no real good reason why anyone would want to sell one of these so I was curious mostly about that.   My area is a resort area so it's a concern.  

4.  Building vs buying existing?  Seems building would be pricey, but buying existing seems like it might land you in a position where the rents can't cover the new mortgage and costs due to what they want for them.  

5.  Can you 1031 duplexes into these or is it not enough of a "like" property?

6.  Better to just buy some storage units, RV park, or something like straight to pure commercial, strip mall etc.  

I'm pretty comfortable buying houses, but these fall under some different rules.  I'm just seeing what those rules are.   Any other thoughts are welcome.  

 The contract isn't complete obviously.   So I also wondered if it's just possible to re-write the contract despite the fact that it's recorded and make a new one.   Seems like that breaks some sort of law out there, but again, doesn't hurt to ask. 

 No, it's a single family home used as a rental.  Going from the sale of that to a Duplex.  

I was hoping that wasn't going to be the answer as I do not know any private investors or even where you'd look for that.