Rehabbing Apartment Properties, Part 1
Published March 16, 2014
Rehabbing multifamily apartment properties can be a pretty daunting—not to mention costly and risky—prospect to consider. Is this property rehab-worthy in the first place? If you are purchasing a run-down property, are you getting it for a low-enough price that, in the end, you will not come to the conclusion that you might have been better off demolishing the original structures and rebuilding from scratch? These are questions you may want to ask yourself before beginning any multifamily housing rehab project.
The reasons multifamily rehab projects fail are:
1. The project costs more than originally projected.
2. The project takes much longer to complete than projected (therefore costing much more).
3. Your economic forecast for the improved property was greatly overestimated. In other words the property does not fill at the occupancy needed, and/or the new rents are much lower than projected, and/or the expenses are higher than expected.
The first step is to assess the extent of the building’s damage with an expert. The most promising candidates are those that do not require extensive structural repairs, for these can be far too costly. Buildings with wood rot, for example, or that have long since been condemned by local authorities, may not be worth the cost of a rehab. If you can tear down a building and start from scratch for close to the same cost as a rehab, this is always the better route to go. You’ll have a much better asset that way. On the other hand, sometimes you’ve paid too much for the property, and the condition will be too good to be worthy of a rehab project. So there’s a very fine line there.
Other things to consider are unit configurations, economies of scale, and bringing an older building up to code in accordance with modern-day building requirements. The latter can oftentimes be unexpected and the most costly aspect of any rehab project, and entails setting up a code review with a consultant who will then conduct an existing conditions survey on the property. In addition, you will need to hire another consultant to do a code check that will verify whether the intended usage for the property will be deemed acceptable. The code check includes building codes, fair housing design requirements, the Americans with Disabilities Act (ADA), zoning and parking requirements, and various other items.
Developers then must meet with the local jurisdiction to ensure that they and the code consultant agree with one another. Building codes represent a high level of uncertainty, since they vary from one jurisdiction to the next. For this reason, it is important to work directly with the local building code officials from the outset, since a local inspector will always have the final say in the matter.
If the inspector’s opinion of the project is negative, there is no higher authority to appeal to. However, soliciting a third-party opinion might not be a total lost cause. In certain circumstances, builders who have brought in other building code experts have been extremely fortunate, and most inspectors would rather see the older buildings reused than abandoned or demolished.