Getting into Real Estate for the Long Haul

As the market slows, eager investors are looking for properties to rehab and offer for rent.
By: Al Heavens: Realty Times
They represent the future of real estate in this time of uncertainty - 17 bright-eyed and eager students, median age 40, sitting for three hours in a classroom while I click slowly through a 50-slide Power Point presentation with embedded video and audio.

These are small investors, a mixed group of young and old, Realtors and nonRealtors, and all ethnicities - a true mix of the modern-day urban market.

They want to know what I can tell them about renovating one-to-four unit properties cost-effectively, whether or not to hire an architect, what to look for in a contractor, what will put their rentals a cut above the others without breaking their budgets.

These are not flippers. These folks are in for the long haul, agreeing with some expert who told me this week that this isn't the time to experiment with real estate but to get serious about it.

One of the experts whose video was embedded in the Power Point was Carl Dranoff, a developer who was one of the pioneers of the warehouse to loft conversion boom on the late '70s to mid-'80s in many of our older cities.

When interest rates were hovering at 18 percent and creative financing was in its infancy, Dranoff turned his attention to the rental market, and that what these former factories and warehouses became. He attracted the same kinds of renters who are buying urban condos these days - young single or recently married professionals and a few brave empty nesters willing to live on the then-mean streets of the city.

Although he focused on big projects, a lot of what Dranoff recommends can be tailored to smaller projects. On the top of his is location: Look at emerging neighborhoods that are not yet at the forefront of development. Look at smaller projects in areas where large ones are changing the equation.

Don't expect to find bargains at the intersection of major city streets.

Look for buildings with good bones: High ceilings, big windows, wide-spaced columns. For residential use, the shape of a building is important, since light can only penetrate a space up to 20 feet.

The larger the windows, the bigger the ceiling height, the more opportunity for being "sun-splashed."

Look for character-defining features, such as brick walls that can be restored.

Columns are another character-defining feature. Columns were used in lieu of beams, with the load carried by the flair-out at the top of the column.

The problem with columns is that they are often in the wrong place, so you have to adjust the spatial layout to accommodate them.

Remember: Because you are trying to accommodate architectural features with living space, "you can't make every apartment perfect," Dranoff said.

Lay out each room of an apartment with furniture; otherwise, you end up without door-swing clearance or with a piece of furniture without enough walk-by clearance.

Expect to install brand new systems: Plumbing, heating, ventilation and air conditioning. Even technology has to be introduced - high-speed Internet access or fiber-optic cable - especially for those investors whose buildings will house a younger market - especially grad students and dot.com professionals.

Dranoff is a proponent of the "gut rehab," or starting a renovation with a blank slate. That means, removing the interior down to the frame and starting over.

That way it's easy to start installing heating, cooling, ventilation, and plumbing systems.

You need to pay attention to ductwork, since it is often difficult to penetrate obstacles such as concrete walls with a duct.

That's why you need a mechanical engineer to design the system, and have that person handle obtaining the permits and the equipment suppliers needed for the work.

To the neophyte investors, Dranoff recommends starting small.

Buy a small building. Surround yourself with good people: a lawyer, architect, plumber, electrician, and more who can be depended upon for advice and to show up when needed.

Know your market: Who is the end user? If you renovate to sell, make sure you have a good real estate firm. If you renovate to rent, have a good leasing agent.

Always allow more time for your project. If you believe it will take four months, make it six, because you never know what you'll find behind the walls.

And, for the same reason, add 10 percent to your budget.

Finally, be very wary of buildings with problems. Environmental issues can make a renovation project less than cost-effective, he said.