Last blog, I wrote about the origin of our first investment property. How we stumbled upon it was unique, but the renovation was even more bizarre in many ways. Let's get into the story again, from starting the renovation process to where we stand today.
If she was wearing her mask, how did she get plaster(?) around her mouth?
Prep Work
Before we could start work, we had to get the city to approve our project. First, it was a matter of getting conditional use to convert the building to residential use; if we failed, we were looking to rent a commercial building at a much lower rate. Our real estate broker was fantastic and helped connect us to the right process to gain approval. Our initial step required us to go before the planning commission to present our plans. The main objective was proving that we were abiding by a conditional use, which was clearly met. After gaining their approval, we then needed to present to the city council. Similarly, this approval was relatively easy to obtain and we had the go-ahead from the city. On a parallel path, we were interviewing general contractors (GC) who could perform the work. We ended up going with a local GC who had decades of experience, a good network of trades, and presented a lot of good ideas throughout the process.
Next, we began working with an architect the GC recommended to get the design and permitting process started. We came across some really funky considerations along the way - most significantly, one wall was angled such that the back end was about a foot wider than the front! The building was 1950's construction, and while it was in solid condition overall, it was not without its quirks. Once designs were finalized, we were ready to submit for permits. Making it more complicated due to the zoning, the approval bounced back and forth between commercial and residential approval like a bureaucratic hot potato. Finally, nearly five months after our closing date, we were ready to begin construction.
The Remodel
Now came the part that was both fun and frustrating: the remodel. Considering this was a functioning office, changes obviously had to be made to serve as a residential rental. So if I said 1970’s office decor, would you picture carpet-trim and block glass? You’d be right, and here’s a picture to prove it!
We were tempted to repurpose the glass, and it "paned" me to throw it away!
Besides the dated look, there was so much more that had to be added. For starters: two kitchens, renovating two bathrooms to add showers, adding a window to make an office a bedroom, and removing several internal walls. Additionally, updates to electrical/wiring, plumbing, HVAC, and even basic landscaping were needed to facilitate the new use. The remodel construction took a full five months - but looked fantastic once completed. The GC and his crew did quality work throughout, and met our deadline for occupancy.
Up and Running
We opened up shop in May 2022 for rentals. On the larger side, which was 3 BR / 1 BA, we decided to make this a short-term rental (STR). The city is a popular destination with several landmarks and wedding venues nearby, so we felt comfortable that we could best capitalize on the space by going STR. We acquired furniture, decorations, and everything else to make our guests comfortable. We hired a property manager for this side who manages multiple properties in the area. She has done an excellent job - we are well-booked and hitting our revenue expectation, while maintaining a 4.9/5 rating on Airbnb. Currently, we have medium-term rental (MTR) that will carry us through a slower winter/spring stretch, and we will re-evaluate our strategy come next year.
On the other side, we have a long-term tenant who has been with us for over a year. He has generally paid on time and has kept the place in relatively good shape. Overall, we are exceeding our cash flow expectations and our estimated property value has grown. In October 2022, our lender helped us secure an All-In-One loan (think HELOC) on the property, which has helped us buy our most recent rental properties. More to come on this in the next blog.
Lessons Learned
While everything eventually came together, we learned quite a bit along the way:
(1) Time is Money
Since we were using a HELOC to buy the property - and proceeds from our personal home sale essentially to do renovations - we were not paying a mortgage per se while we went through the renovation process. That said, we had seven(!) months where were had no revenue. On your typical rental property, you likely can't make that work. In hindsight, we should have created incentives in the GC's contract to accelerate the process (which he could have hit with more manpower), and tried to do more in parallel up-front (e.g. starting design while securing the conditional use permit).
(2) Surprises - Current Condition
Any property you buy, as an investment or personal use, is likely going to have a surprise or two in store once you get going. Usually, it's a quirk like mismatched paint, a gap in flooring, or something small. In the case of renovation, the secrets can lie beneath or behind surfaces. We came across several hiccups - for example, the angled wall that required a shim design to make it straight. Even when you get an inspection, something likely will be missed... you just hope it's not an expensive or necessary fix.
(3) Surprises - Costs
A good real estate investor will make conservative estimates when evaluating the return on their purchase, factoring in potential surprise costs along the way. In this project, we tried to mitigate what we encountered with a Not-To-Exceed (NTE) agreement with our GC, and this helped us plan accordingly. However, we ran into some additional expenses we didn't account for in our planning. The largest was a charge from the city for a sewer connection: $5,000! Because we were making this property a duplex and were replacing a failing sewer lateral, they considered this a new connection and required this payment before we could get our Certificate of Occupancy (CO). After talking to my broker and GC, and researching the city ordinance, we realized we had to pay up. While painful, it needed to be done and in the grand scheme of things, would not derail this investment.
All in all, this project sparked us to continue our investment journey. Next blog will cover our second property, a quadplex (4-unit) property, where we will dig more into property management, financing, and other considerations with multi-units. Oh, and in case you want to know how this turned out, here's a pic of the entry to the STR side. Have a great week!
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