What exit strategy are we using to do $6.5 million in revenue this year in Boston?
There are many ways to make money in real estate. Each niche has its own pros and cons; and its own intricacies. While it is easy to get caught up trying to be a jack of all trades, the smart investor becomes a master at one exit strategy at a time. Once they perfect and systematize that strategy, then they can decide to move onto the next one or not.
That is precisely what CC Solutions is doing.
This blog will explain one of the most successful exit strategies for our real estate investments so far. This is the strategy that CC Solutions is focusing on for the next year. This strategy for buying and selling real estate is extremely effective in densely populated markets like Boston, and specifically emerging and transitioning neighborhoods of the city.
This strategy is the condo conversion.
A condo conversion involves transforming the way a property is owned, by taking a single or multi-family property (2 or more livable units within 1 deed of ownership), and transitioning that property into condominium ownership. For example if you buy a 3 unit building in 1 buying transaction, after your condo conversion, you will end up selling the units individually as 3 separate units of ownership. The way we use this strategy in development, is by purchasing a multifamily property (usually 2-3 units) and gut-renovating the property to be able to sell them as independently owned luxury condos. This forced appreciation of the building through extensive renovations, and maximizing the total sellable units at the end, creates a larger margin at the end of the day for everyone involved.
There are a few reasons this strategy is so effective in densely populated markets like Boston:
1. There is a large amount of inventory to purchase. Within an immediate radius of downtown Boston and similar areas, there are far more existing multi-family homes than single family. This naturally makes sense due to the density of the population and limited space. We can take advantage of these existing multi families, convert them to condos, and sell to the end user (homeowner) market.
2. While people still want to own property and live in the city, multi-family ownership as an owner-occupant (meaning you live in the property you own; opposed to owning a property and renting it) is less desirable because of having to deal with tenants. Most homeowners (that are not investors) do not want to own a 2-3 unit home and have to rent whichever units they don’t live in. If they could live in the exact same building and same unit, they would prefer to own solely their unit and not the entire building while renting the other two. This makes condos more desirable for the end user market.
3. You can maximize your sellable units at the end of your development project. If you can take 1 buying transaction and turn that same project into 2, 3, or more selling transactions, it makes sense that you would be able to maximize your investment. Especially when you are doing deals in transitioning neighborhoods, there are a lot of homes that haven’t been cared for in years and need extensive renovation, but also there are top of the market condos being sold down the street. So it’s a perfect opportunity to maximize your renovations and completely transform a building. Maximizing the amount of units you can sell to individual homeowners maximizes your ROI on that investment.
But what about the paperwork involved?
At the end of the project, there of course comes additional paperwork to be able to sell what was once 1 property, as individual condos. This requires hiring an attorney to draft a new deed to the property and create the condominium association. As well as setting up insurance, condominium fees, and hiring an architect and surveyor for updated interior and exterior plans for the registry of deeds. All in all, the legal documents cost an extra $5,000-6,000 and a little extra work, but certainly worth it if you can increase the value of your property by 20-30% by maximizing your sellable units.
Condo conversions, while not feasible everywhere, are a fantastic exit strategy in a market like Boston. They allow us to use the existing landscape, force appreciation, create remarkable properties for homeowners, and maximize our return on investment for our lenders and ourselves.