What Is An Apartment Conversion...
And How Can It Add Value To Your Investment Property?
My introduction to apartment conversion, or "condo conversion" as it is more popularly known, happened quite early in my real estate investment career.
I had just recently graduated with an MBA in finance, and was looking for career opportunities in the real estate field. I had no interest in becoming a real estate agent, but rather I was more interested in the investment or development side of the real estate business.
One of the companies that I met with had, what I thought at the time, an interesting business strategy. The strategy can be summarized as follows...
1. Buy existing/older apartment buildings that were typically in need of major "cosmetic" renovation, at discounted prices.
2. Without getting too technical, they would then "convert" the apartment building from one property, into several properties. For example, if it were a 50 unit complex, there would now be 50 individual properties that could each be sold to a separate owner.
3. They would undertake the necessary cosmetic renovations necessary (new carpet, paint, kitchen appliances, counter tops, toilets etc.) in order to make the suites appear brand new. They would also renovate the exterior, common areas and landscaping, as necessary, in order to make the entire building look new.
4. The final step was to sell the individual units to investors, who would then rent out the units. The building would typically be managed by a professional management firm and the proceeds passed on to the individual owners. I won't go into detail on the pros and cons of this arrangement for the individual real estate investors other than to say they paid full value for what they received in the end.
The above example is fairly typical of an apartment conversion, except for the fact that the units were sold to investors as opposed to home owners, which is more common.
|If you are interested in learning more about apartment building investment, and specifically how to buy your first apartment property, I recommend this course (aptly) called the Buy Your First Apartment Building E-Course.|
Let's quickly break down some example numbers and see where the value was created. I purposely omit the soft costs (legal fees etc.) involved for illustration purpose:
50 Unit Apartment Conversion Example
- Purchase Price: $2,000,000 or $40,000 "per door" (this is industry jargon for per unit)
- Renovation Costs Of Suites, Common Areas and Exterior: $750,000 or $15,000 per door
- Total Cost Per Suite: $55,000
- Individual Unit Sales To Investors Based On Market Comparables: $85,000 per door
- Profit: $30,000 per door, $1,500,000
As you can see, condo conversion can in some cases be a lucrative exit strategy for apartment building buyers.
There is an old saying that sums up apartment conversions quite nicely:
"The sum of the parts is greater than the whole."
Return from Apartment Conversion to Commercial Real Estate Investment
Return from Apartment Conversion to Apartment Building Real Estate Investment For The Rest Of Us home page