Investment in Real Estate 203 – Change of Classes or Uses

Website design By BotEap.comBack in Real Estate Investing 101, I briefly mentioned “Changing Classes” after the Buy & Hold strategy. There are a few different ways to change classes and uses that can create value for investors.

Website design By BotEap.comResidential to Commercial

Website design By BotEap.comOne of the most common ways to increase value by changing class or use is to zone a property from residential to commercial use. A property that is located on a busy street would be a good example. The busy street reduces the value of a residential property due to noise and associated traffic. It is even more true on a corner lot. Therefore, this busy location is a detriment.

Website design By BotEap.comHowever, for a commercial property, traffic is an asset. If it’s a corner lot with heavy traffic on multiple sides, that’s even more of an advantage. A savvy investor could see the commercial potential of a property, possibly even years before rezoning. In fact, it is preferable to buy the property well before it can become commercially zoned and rent it out for residential purposes. The reason one may choose to do it this way is that the property can be purchased at the best price and then the lessee can offset the costs while the investor seeks to have the property rezoned. Depending on local rules and nearby zoning, as well as any future plans the city may have, it may take a year or more to get the property properly rezoned. Meanwhile, because the property is located on a busy thoroughfare, advertising to tenants is as easy as posting a sign on the property.

Website design By BotEap.comKeep in mind that the frontage can be just as important to commercial property as the acreage. That’s another reason why corner lots are so valuable. They have up to twice the frontage/acre of a lot on a single street. Obviously the size of the lot will influence this, but in almost all cases the corner lot is the premium.

Website design By BotEap.comLow Density to High Density Residential

Website design By BotEap.comAnother popular way to increase the value of land is to shift it from a lower-density residential use to a higher-density residential use. Finding a single property or a set of properties to rezone to a higher density can increase the attractiveness of the property to a developer.

Website design By BotEap.comOf course, as with most real estate, location is everything. A townhome or condo development might not be in demand in a less densely populated area, but could support very high valuations in a sought after area. It could also be a great way to capitalize on a smaller parcel adjacent to a popular subdivision. For those familiar with the St. Marlo subdivision in the far south of Forsyth County outside of Atlanta, The Weston next door is a great example.

Website design By BotEap.comApartment to Condo Conversions

Website design By BotEap.comThis is an often overlooked strategy and is similar to flipping, but on a larger scale. It’s out of reach for most investors, but buying an apartment complex and turning it into condos can be extremely profitable. This is especially true in a slightly older community. As the community ages, the demand may decrease. As demand drops, rent may not keep up with newer complexes. At the same time, the mechanical systems will be prepared for an overhaul. If you can buy the entire operation at a reasonable price, you could turn it into individual ownership.

Website design By BotEap.comThere are a few different strategies that can be employed depending on the needs of the investor, as well as the needs of the community and property in question.

Website design By BotEap.comStarting at the low end of the economic scale, if the property is converted to a condominium, there may be reluctance from current residents. One way to overcome this is to build a pricing model that allows the majority to stay in place, increases the value of the community, and sells the remaining units faster. Finding a financing solution that converts a tenant into a buyer means you don’t need to market as many units. Offering to pay closing costs, finding sources of down payment assistance or 100% loans would also help ease the transition. If there is a way to allow current residents to buy below what the property will market for, this is even better. This gives current residents instant equity, and they will be more likely to be better neighbors since they now have a stake in the community. Occasionally, conversion to low-income housing can also result in tax benefits for investors. Having single unit or multi-unit investors online in case there are residents who do not want to buy is also an option, but not as attractive as there will be many residents without a financial stake in the community.

Website design By BotEap.comThe same strategies can also be used with higher priced properties. However, financing is usually easier to set up. Many of the residents may already be considering buying their next residence, and allowing them to buy below market will be very attractive. Set up various programs that allow for different pricing based on renovations to existing units. Offer a low price for non-renovated units (residents of those units only), a mechanical-only upgrade, and a full upgrade including fixtures, etc. For a full upgrade, a similar unit could be offered nearby to allow for a quicker transition.

Website design By BotEap.comThis can also be done with vacant apartment complexes, but there will usually be much higher renovation costs. However, the profit margin can be significantly higher. As I was driving through New Orleans earlier this year, I couldn’t help but think that there were great opportunities out there in apartment renovations.

Website design By BotEap.comCommercial to Condominium

Website design By BotEap.comLoft conversions are very popular. Most of the conversions that are currently taking place are of a very high level. However, this can be done at various price points. The main difference will be in the level and amount of finishing of the units. Finding a building worth saving that is convertible into residential space is the first challenge. It has to be unique and have a lot of character.

Website design By BotEap.comIf one is targeting the lower end of the market, all one needs to do is provide the plumbing stubs and require the buyer to build kitchens and baths themselves. Set some kind of minimum standards and make sure all work is allowed and done according to local code.

Website design By BotEap.comGoing forward, you can choose to put bathrooms and kitchen, either completely finished or in some other state agreed by the buyer. One could also go as far as having multiple private rooms and fully outfitting the space with high-end finishes and fixtures. Additional amenities ranging from swimming pool and parking to wireless high-speed Internet access can be included.

Website design By BotEap.comIn all condominium conversions, whether apartment or commercial, it is very important to establish some type of HOA. This will help keep the community cohesive as it becomes more populated. This also provides a mechanism to care for common property and maintain amenities. Another issue that the OA will have to address is the level of tenants in the community. The lower the percentage of tenants v. owner-occupiers, the lower the overall maintenance needs. However, if no tenants are allowed, it could negatively affect resale values. There are many different strategies to deal with that particular situation.