It is common there to build a home on a hill with the front elevation of the home looking like a single-story house, but the back of the home opening down the hill and fully to the outside with a walk-out from the typically unfinished basement level. This means there are large windows in the lower level opening to the outside that you do not find in a traditional basement, which means you can legally build out bedrooms in this unfinished space.
This unfinished space was economical to finish off as the structure was already in place. I had a blank template to work with. Simply create a sensible floor plan, get your permits and add walls, closets and a bathroom. The bathrooms are typically always roughed in, so plumbing is in
place. It is very easy to almost double the square footage of the home. The best part is your return on investment on this renovation is two to three times the investment. With this value play, the rental increase gave me nice double-digit returns and when markets dictate it is time to sell, I can easily attract a retail buyer.
What we are facing today as deals get harder to find
Over the past few years there have been incredible opportunities to buy some very low-priced investment properties. Everyone of course has noticed that prices are rising, and it is getting harder and harder to find a good deal. During these times you should look for the value play like I did in the Midwest. Making changes, sometimes just small changes, can add big values to a property.
Some of my best investments have been during market value increases
This is the time to get creative and manufacture your own good investments like I mentioned above. When great deals stop landing in your lap, you simply need to think smarter about how to create, or manufacture, a better investment.
For example, I like looking at properties with two bedrooms, two baths and a two-car garage that also have good square footage. On a few occasions I have been able to find these properties and very inexpensively add a wall or two and a closet to make a third bedroom. One such property had a 29-foot by 20-foot living room. It was such a large room that it really did not make sense to use it as a single room. We simply added a wall and a closet and made a third bedroom. I now had a 3/2/2- the quintessential perfect home for a retail renter.
I was able to rent the unit and create a nice sustainable double-digit return. When market dictates a sale, it will be a great property to sell to a retail buyer.
Here are some value play style investments
- Path of progress investing: As neighborhoods transition to higher demand neighborhoods (such as when shopping malls and commerce roll into an area) you can take a Class C building (perhaps a multiplex) and convert it to a B or an A class building. I once took a fourplex that was renting for $900 per unit and increased rents to $1250 per unit simply by adding granite countertops, new door pulls, fresh paint and wide base trim with some accent trim and new doorknobs. Giving your place a little beauty makeover and attracting better quality renters is a simple and inexpensive way to manufacture growth. As multifamily properties’ values are derived from the revenue they collect, you can see what those rent increases did to the overall property value as well.
- Condo conversions: This is more of a process involving legal work and converting the way a property is recorded. Not all properties can fit into this mold, and you will want to do proper diligence, but it is still a very lucrative value play. The process will vary by location, but typically you will need an architect’s opinion (on the structure), an attorney drafting the needed paperwork, and of course approval of the local municipalities.
- Motel to office condos: Motels are being replaced by larger hotels. When located in the right place a motel may be able to convert to office condos. These are more detailed investments for the active investor but the rewards can be substantial when done correctly.
Think about smart ways to make your own value plays, and you may be able to manufacture your own very lucrative real estate investments.