When to Convert to Condos?

[2ndstory]

I was thinking about converting my 4 plex to Condos and selling them off. The condo market is still pretty good here in Winnipeg. I have a mortgage of about 290k on the building. Each door cashflows $150 per month net. Each is a 2 br unit and could sell for $150k to $175k each as a condo.

Why should I do it?

Why shouldn`t I?

Looking for some opinions.

Nik

 

[bizaro86]

Would you be able to replace the four plex and have money left over if you sold the building as condos? Would the amount of money left over compensate you for the cost and hassle of converting and selling four units?

I would also speak to someone regarding the potential tax consequences. If you buy a fourplex, rent it for awhile, and sell it, it would be taxed as a capital gain. If you buy a fourplex, convert to condos right away, and sell it, it would probably be income. I`m not sure where the line is drawn between those two, but its worth investigating.

Michael

 

[Thomas Beyer]

QUOTE (2ndstory @ Dec 2 2010, 01:35 PM) .. Why should I do it?

Why shouldn`t I?
Upside: bigger gains
Downside: more cash required, re-financing most likely required and significant risk if not done well !

Steps required:

1) Ask the municipality if they allow it - many do NOT!

2) Get a surveyor to draw up a condo plan

3) Get this plan approved by city .. surveyor will do that for you

4) Get a mortgage that allows partial discharge, or replace big mortgage with many small ones

5) Get a reserve fund study done .. and spend $s on required major items (roof ? boilers ? paved parking lot ? in-suite ? )

6) Open strata corporation !

7) Do a market analysis (or perhaps before step 1)
- Best is 2BR or bigger
- Great location required
- Large Suites & Upgraded is best !

8) Find a realtor / sales channel capable of selling condos .. easy for 1 or 2 .. very hard for 5+ or bulk sales !

9) Prepare disclosure documents

10) Prepare marketing: website, brochures, prices, discounts,…

11) Start selling condos ..

12) send us a postcard from Hawaii and your new yacht !

 

[bizaro86]

QUOTE (ThomasBeyer @ Dec 2 2010, 02:30 PM) 8) Find a realtor / sales channel capable of selling condos .. easy for 1 or 2 .. very hard for 5+ or bulk sales !

I`ve heard this comment before, and I`m wondering why he (or anyone) couldn`t just sell the condos one by one as tenants move out. If any upgrading is required (roof, parking lot, fire systems, etc) its likely to be common area and/or not too invasive to be done while tenanted. The suite interiors may also benefit from updating, but that could be done on move out as well. The benefits of this approach would be that you`d have the rest of the suites cashflowing while one was being renovated/sold, and you`d only have to sell one at a time, which seems likely to be easier than selling them in bulk.

Is there any reason I haven`t thought of why this approach wouldn`t work for a patient investor with a well-tenanted building? Especially in a smaller plex (ie if there was 120 suites it might take unacceptably long), it seems feasible.

Michael

 

[Thomas Beyer]

QUOTE (bizaro86 @ Dec 2 2010, 02:43 PM) I`ve heard this comment before, and I`m wondering why he (or anyone) couldn`t just sell the condos one by one as tenants move out. ..
That is a good option if
a) the mortgage allows it (or your have 4 actually)
b) enough cash is on hand to feed upgrades and months with no income for that suite
c) all proper legal paperwork (survey, reserve fund studt, condo corp/party wall agreement, ..) is in place

 

[bizaro86]

QUOTE (ThomasBeyer @ Dec 2 2010, 03:54 PM) That is a good option if
a) the mortgage allows it (or your have 4 actually)
b) enough cash is on hand to feed upgrades and months with no income for that suite
c) all proper legal paperwork (survey, reserve fund studt, condo corp/party wall agreement, ..) is in place

Interesting. So then it would only depend on success in steps 1,2,3,4,5,6,7,9 and 10!

That seems like a more workable plan for a 4 plex with a lot of equity, as he might be able to get mortgages on 2 or 3 suites large enough to pay out the mortgage on the entire four plex, leaving an unencumbered one to sell. A few individual mortgages should be doable, but if he needed 25 individual mortgages I could see that being a very big challenge.

Michael

 

[Thomas Beyer]

QUOTE (bizaro86 @ Dec 2 2010, 05:02 PM) Interesting. So then it would only depend on success in steps 1,2,3,4,5,6,7,9 and 10!

of course some significant work is required to make significant money in real estate .. it is not as passive as CRA or some investors think !

QUOTE (bizaro86 @ Dec 2 2010, 05:02 PM) ...
.. A few individual mortgages should be doable, but if he needed 25 individual mortgages I could see that being a very big challenge.
unless you have not a good, but a great mortgage broker !

Cash .. and access to cash is a critical success element in any real estate deal !

 

[Berubeland]

I was working for an investor who did this with his building in Brampton. This can be very profitable for the patient investor, he has been working this plan for 5 years. The biggest problem is the city. They make it really hard.

In Toronto anything 5 units or under does not require city approval.

He has 60 units in that building.

He is also doing the exact same thing with a strip mall he owns. There are 5 stores each with one apartment above. He is severing each property and selling each piece individually. If he sold the mall as one piece he would get a lot less than each store. Each store in that area will sell for $600K, he`ll make an extra million (less expenses) by selling this way.

It`s funny when you meet different investors how they each have their own way of profiting from the real estate market. This particular guy is an extremely savvy buyer and absolutely horrible property manager. Said strip mall above is free and clear, he bought a property with three buildings on it and severed them and sold the two buildings for more than he paid for the three buildings. When I was doing property management for him out of 10 spaces 5 were vacant and in very bad condition.

Then other investors buy at market prices and improve the property, get great tenants and just pay down the mortgage. There are lots of this kind of investor.

Other investors go with the bad area and just keep renting it as is.

I have another investor he just buys new condos, they don`t cash flow, he doesn`t care, his goal is to own several million dollars worth of free and clear real estate by the time he retires and collect the cash as a kind of pension.

Other people buy land.

Several landlords do just industrial and wouldn`t touch residential with a 10 foot pole.

There is no "right" way to make money in real estate just the way that suits you the best, that works well with your personality and skill set and those of your tenant demographic. Once you find a sweet spot stick with it.

It seems to be the same with the stock market too.

 

[Thomas Beyer]

QUOTE (Berubeland @ Dec 3 2010, 01:15 PM) .. Once you find a sweet spot stick with it.
well said !!

and I might add: gradually improve it to become more efficient at it !

 

[Nir]

QUOTE (Berubeland @ Dec 3 2010, 12:15 PM) I was working for an investor who did this with his building in Brampton. This can be very profitable for the patient investor, he has been working this plan for 5 years. The biggest problem is the city. They make it really hard.

In Toronto anything 5 units or under does not require city approval.

He has 60 units in that building.

He is also doing the exact same thing with a strip mall he owns. There are 5 stores each with one apartment above. He is severing each property and selling each piece individually. If he sold the mall as one piece he would get a lot less than each store. Each store in that area will sell for $600K, he`ll make an extra million (less expenses) by selling this way.

It`s funny when you meet different investors how they each have their own way of profiting from the real estate market. This particular guy is an extremely savvy buyer and absolutely horrible property manager. Said strip mall above is free and clear, he bought a property with three buildings on it and severed them and sold the two buildings for more than he paid for the three buildings. When I was doing property management for him out of 10 spaces 5 were vacant and in very bad condition.

Then other investors buy at market prices and improve the property, get great tenants and just pay down the mortgage. There are lots of this kind of investor.

Other investors go with the bad area and just keep renting it as is.

I have another investor he just buys new condos, they don`t cash flow, he doesn`t care, his goal is to own several million dollars worth of free and clear real estate by the time he retires and collect the cash as a kind of pension.

Other people buy land.

Several landlords do just industrial and wouldn`t touch residential with a 10 foot pole.

There is no "right" way to make money in real estate just the way that suits you the best, that works well with your personality and skill set and those of your tenant demographic. Once you find a sweet spot stick with it.

It seems to be the same with the stock market too.

Thanks Berubeland. Nice summary and reminder of the different investors out there with different personalities and strategies.