Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I read a piece on investing in historic districts recently, and it reminded me of a story...
Back 10 years ago or so, an acquaintance of mine was getting into rental properties.
He found a great one. It was a beautiful four-bedroom brick home in a great neighborhood in the city of Detroit. Yes, there are great neighborhoods in Detroit. Not many, but they do exist.
He got it for a great price. And it was in excellent condition and there wasn’t much work that he was required to do to get his Certificate of Occupancy. The only item on the list of any significance was the windows. He was required to replace them.
So he was looking forward to a quick and relatively inexpensive spruce up, and then getting it rented.
What he didn’t realize before he closed on it, though, was that the home was in a historic district.
So after he closed, he got busy on the spruce up, and hired one of the replacement window companies to swap out the windows. I recall him saying that the cost to do that was something in the area of $2,500.
He got the shock of his REI life when he met with the inspector to get his C of O after the work was completed.
The inspector told him that the house was in a historic district, and because of that, standard-issue vinyl replacement windows weren’t acceptable.
And he was going to have to replace his new replacement windows with wood windows that were similar to the original ones.
The cost? $20,000. Over and above the $2,500 he had already spent.
He didn’t have any options. He appealed to the historic district board, and since the original windows had been disposed of he lost the appeal.
He was stuck. He couldn’t sell it or rent it without the C of O, so he bit the bullet and ponied up the $20k.
Talk about a lesson!
I immediately put checking for historic districts on the checklist I use when I buy. I think everyone in our REI networking group did the same.
Solid Advice
So, the piece I read had some good advice for folks that want to work with houses in historic districts.
They suggest that, while you may have some ideas of things you want to do to the property, before you make any changes to the structure itself do some research and make sure you have the answers to these 3 important aspects:
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If the property is designated as historic, you’ll likely have to adhere to a number of regulations and be subject to some historical preservation oversight in order to update the home. Find out what those regulations are.
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Have a plan for what you’d like to do and how extensive you want the updates to be. Do you plan to take it back to the studs, or simply do some cosmetic work? Is there exterior work necessary?
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How authentic are the renovations required to be? The more authentic, the higher the cost in materials and labor.
The article also provided some definitions common with historic properties to help navigate the often bizarre rules that preservationists require:
Preservation
Restoring and using the building for its original purpose, with as much of the original features and décor saved as possible.
Restoration
Tearing out improvements made over time that don't reflect the original age and style of the home, and then repairing those areas to closely match the original size, shape, color, etc.
Reconstruction
Making major changes to the floor plan such as adding new rooms and dramatically altering and repurposing parts of the home.
Renovation
Also called remodeling freshens the look of the home using modern materials such as updating an older kitchen with custom cabinetry, farm sinks and granite countertops.
The key though is knowing what you’re getting into.
Had my acquaintance done the research up front and known about the historic district, he could have baked the price of authentic windows into his purchase math and evaluated the deal with the real cost to renovate and negotiated the price down because of it.
So, beware of historic districts, especially if you plan to buy rentals in them. Because the rules can change.
Share Below
Tell us about your historic district investing experiences in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.