What to Consider When Investing in Outdated Buildings

If investing in property was easy, everyone would do it. However, that is not the case as would-be investors not only need access to investment capital, but also the skill to identify the best properties, negotiate to acquire it at the best price, and then oversee any planned improvements before bringing the property back online.

This is especially true when it comes to outdated buildings. Sure, these properties can be the proverbial diamond in the rough, but when it comes to the retrofitting of buildings, here is a list of what to consider.

1. Flexibility

When considering the best ways to breathe new life into an older building, one of the most important things to consider is how much flexibility will you have in the project. This is important as many older buildings were built for purpose and as such using the existing floor plan for something else can often be problematic.

Adding to this is the continued blurring between where we live and where we work. While zoning can also be an issue; the bigger question is whether the property, with its current floor plan, can support mixed-use applications? As such, investors need to look at the flexibility of the property as it is today and what it will cost if they need to make major changes.

2. Adding Units or Bedrooms

This is one of the oldest tricks when it comes to increasing the investment yield of property is to subdivide existing units or to add bedrooms. Doing so not only decreases the downside risk from a vacancy and, in the case of adding bedrooms, can dramatically increase the base rent per unit.

From the investors' point of view, this is a no-lose situation, and therefore developers have been doing this for years. By the way, the same strategy works for commercial properties and its part of the reason why co-working spaces and serviced offices offer higher rental yields than standalone offices.

The lesson here is that that one of the best ways to guarantee your return on an outdated building is to simply add more units or amenities. The very fact that the building out-of-date means that you will have to retrofit the HVAC, plumbing, and electrical systems, so why not take steps to make sure you get your money back?

3. Project Costs

As mentioned, adding units or amenities can help to ensure your return, but the flip side of this is the capital investments you'll make. Assessing investment costs is one of the things experienced property investors do best – largely because they are experienced.

If you are new to the game, then you might want to go it alone. This can be accomplished by reaching out to experienced contractors or job estimators to walk you through the ins and out of a planned project.

Doing so will not only save you money, but it will help you build the projections needed to determine if the project is worth it or not, as well as the proposed project sensitivities to time and interest rates.

4. Maintenance Costs

You might think that just because a project is built out and rented that your job is over. The reality is that it is just starting. One of the biggest keys to making secure a return on investment is to take care of the property.

However, maintenance costs can get out of control if not watched closely. As such, you need to have a plan for maintenance and how to manage it. This includes making sure you have a maintenance reserve in place to help cover unexpected costs.

5. Location and Other Factors

This probably goes without saying, but when considering any real estate investment, the location may be one of the most important factors. This is because the location will not only dictate how much you need to pay for the property but will also limit how much you can charge in the future.

Demand, public transportation, proximity to schools, shopping, and other services all come into play. As such, when you consider the impact of the location you will want to look at comparable properties in proximity and then use this information to determine the right acquisition price and rental rates.

Also, you will want to consider zoning restrictions and even other issues that might impact property values. These could include the number of similar projects current under development in the area, any infrastructure investments the local government is planning, and the best and worst time to buy and sell a property.

Don’t take investing in outdated properties for granted, look at the factors which could impact success first and then decide if the investment is right for you.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.