Renovation Projects: Pros and Cons

Hi! Christine Toes posting... I enjoyed reading Noah's renovation post last week and wanted to add some personal perspective. I have been through renovations for an alcove studio co-op on the UES, a three story townhouse investment property in Brooklyn, and am in the middle of a partial renovation of a one bedroom co-op in the W Village.

Co-ops require the use of licensed and insured workers. I needed to get the townhouse up and running so I could get renters into it asap. So I used a contractor for all three jobs, none of my own elbow grease.

So here are some numbers for you. My E. 63rd St apt was a learning experience for me, so not my best investment but I was still happy with it:

440 sq ft alcove studio. Paid $310K in July 2006. Needed new kitchen, new bath, closets, floors, painting. Total cost of labor and materials including marble bath w/ Kohler fixtures + granite/stainless kitchen was $30K. Think "GE" quality appliances (or something even less expensive) for an alcove studio. Anything too high end and you will not recoup your costs! Having at least one "brand name" to catch people's eye in a property description never hurts, but don't even think of putting a SubZero refrigerator in a studio or one bedroom co-op apartment in a 1960s building.

Time it took for board approval and the renovations to be completed: 12 weeks (mortgage + maintenance was approx $2,200/month, so figure $6,600 spent for carrying costs). My contractor was terrible, which cost me at least a month of time.

You may have to pay "double rent". I have the luxury of having a father in a rent stabilized 2 bed in Stuy Town, so I spent 3 months in a twin sized bed in the apt I grew up in. My dad is a saint and let me stay there rent-free (my dad rocks!). Luckily I didn't have much furniture, so I spent $75/month on storage.

The apt was in a landlease building and the land rent was going to be renegotiated in 2009. It was looking like the maintenance was going to go up a lot, plus I learned a huge lesson with the move - the Upper East Side, while lovely, is not for me. So in June 2008 I decided to get out, thinking I might move to my house in Bed Stuy for a while if one of my tenants moved out. I sold the apt for $400K two years after buying it. So here's the math:

Purchase:
$30K renovations
$6,600 carrying costs while apt was under reno
$225 storage
$3,700 closing costs + attorneys fees (co-op closing costs are much lower than condo closing costs)

Sale:
$24,000 brokers fees (I made about $9K of this back but lets say for demo purposes that I didn't)
$1,500 attorney fee (actually he discounted it to $500 b/c I have used him so many times & now that we have done this a few times, he doesn't have to do any hand-holding. Usually you are going to pay at least $1,500 for an attorney for a studio, so let's use that number)
~$19,300 NYC and NY State transfer taxes (1.425% of sale price) and other closing costs

Total expenditures = ~$85K

At the time of the sale, the mortgage was approx $235K since I had paid down some of the principle over the two years. So I netted ~$17K (plus the $9K back b/c I am a broker, but again, I'm not counting that here), which may not seem all that exciting at first glance. But I also received tax benefits for the mortgage interest (about 85% of the monthly mortgage payments for the first few years of the mortgage) and 45% of the maintenance payments. Those tax deductions were over $16K in two years. So I consider my "profit" to be more like $33,000.

One last point to consider (although I am not using this in my calculations anywhere) is that I also looked at subletting out the apartment and had an offer of $2,400 a month to sublet it, so my monthly costs to own were actually less than what I would have paid renting the same apartment after the renovations.

Figuring out the opportunity costs of the up-front $62,000 down payment + the up-front ~$40,000 renos, carrying costs and purchase costs depends on the rate of return you think you would have been getting. Let's say I would have made $11K on my $102K in 2 years (some people have sadly lost 30% of their stock portfolios in the last 6 weeks, so I'm estimating a conservative investment vehicle).

So say my true profit for buying and fixing up an apartment and living there for two years instead of having the $ sit in the bank for two years and renting instead was $22,000. With total expenditures of $85,000 and opportunity costs, I "made" a 25% ROI in two years.

As a real estate agent, this was an invaluable learning experience for me & I actually found it fun. My favorite part of the experience was getting to renovate something to my own taste. I was so happy to come home to my "own" apartment! But I was also careful to keep the resale in mind and do something that other people would like without going too high end. It is a huge annoyance to walk into a "renovated" apartment and hate the renovations. You have to be careful not to add too many "bells and whistles" or to go too crazy with gold fixtures, pink marble, etc. Look at new condos and condo conversions, aim for finishes that are timeless (but potentially not as high end, especially for smaller spaces), and at least most buyers wont think they need to rip everything out and start over!

Toes says: If you love the "bones," don't be afraid to take on a renovation project if the numbers make sense to you. Plan to live there for two years to avoid gains taxes. Keep an eye on whether a building has a high "flip tax."

Toes says: Manhattan is not a great place to try to buy and flip something, especially when buy side demand is softening. The entry and exit costs eat too much into profit margins. In addition, c nstruction and moving costs here are relatively expensive.

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