Perhaps you have your eye on a smaller apartment building that you would like to buy. And then an idea comes to you. Why not buy it and convert it from a rental property to a condominium?
It’s an appealing. In some cases, you can earn large profits very quickly. However, you need to be careful. Here are some factors to weigh . . .
- The higher cost of renovating vacant units. Remember that potential owners are often looking for more upscale features than renters are – features like granite counter-tops in the kitchens, whirlpool tubs in the baths, and secure indoor parking.
- Sale prices of comparable units in your area. Look at data from actual purchases and see how much profit you can realistically expect to make on each unit. Hint: You are probably not doing enough research if you begin to think, “This unit should sell for $350,000.” To be sure you will make money, there should be no “shoulds” or “woulds.” You have to base your projections on actual recent sales of comparable units.
- The difficulties of selling to current tenants. If you have four tenants in place in what will be a 10-unit condominium, for example, how many of them will be willing to buy? If they wish to remain as renters, what do local laws have to say about their tenant rights? It is possible that you will need to allow them to keep renting indefinitely while they pay only small annual rent increases that are limited by law.
- Legal issues. You and your attorney need to carefully review local zoning regulations and laws to be certain that your condo conversion will be legal – and that the costs of making the building conform to local codes will not be prohibitive. For example, one investor learned that if he converted a building to a condominium, he would be required to remodel the building to be sure that the lobby was barrier-free. If he left the building a rental property, that conversion was not required.
The bottom line? Profits could lie ahead if you do a conversion. But proceed with caution, work the numbers realistically, and ask a lot of questions before moving ahead with your real estate investment plans.
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