The Pitfalls (and Benefits!) of Purchasing Older Multi-Family Properties

The Pitfalls (and Benefits!) of Purchasing Older Multi-Family Properties

When looking at potential commercial real estate properties to invest in you are sure to come across listings in various states – pristine to falling apart, vacant to full, or new to old.  In the case of the new to old spectrum, particularly for the multi-family arena, properties prior to 1980 tend to have certain peculiarities or quirky features which may leave you with a slew of questions.

Older properties are time capsules, giving us insight into how previous generations once lived.  Although fascinating and in some cases beneficial, these features can also be a headache for investors as changes in economics, technology, gender roles, and expectations of privacy have outmoded the usefulness of these design styles.

Below is a list of eras which feature certain design characteristics which are either outmoded, have the potential of adding value to the asset, or potentially hazardous toward human occupation.

1880’s – 1920’s   

The late 19th and early 20th-century apartments were constructed during one of the largest development booms of modern history.  Overcrowding in cities led to the development of secondary markets which were only made accessible through the implementation of transportation systems like the street car.

While still in a Victorian mindset with regard to design aesthetic, this era provided an influx of commercial properties which are still in use today including Two-flats, Greystones, Courtyard Buildings, and Row Houses.

As an investor looking for a property which can be repurposed to meet the needs of the current rental market, these assets can be a bit tricky.  More often than not, the room sizes are not ideal.  Properties from this era are known to feature small hallways, bedrooms, and kitchens, plus insufficient closet space, putting the spaces at odds with the vast majority of today’s renters.

Additional concerns include the building materials and design of the structure.  During this period lath and plaster was the popular building process used to finish interior walls.  These days this system is much more expensive to repair or replace and are known to crack.

Roofs are also a major concern with properties from this era.  Although ornate and sure to attract renters who are looking to live in a building with “architectural flair”, these roofs with their numerous peaks and valleys will often have issues with drainage which will can lead to large repair bills.

However, there are also value-add benefits with these properties.  This era relied heavily on natural light due to the fact that reliable electrical service and air conditioning would not be common place until 1940.  The bay window was an invention on necessity which provided increase ventilation and brought in more natural light.  Through the large outward angle of the window any space will look larger increasing the perceived value of the asset.

These properties are also known for the origination of what is now referred to as “Green Spaces”.  The courtyard apartment was developed heavily across the U.S. during the 1890’s through the great depression.  These multi-family properties were designed with semi-public garden spaces to bring nature into the lots.  Today, green space is a very desirable amenity and can add perceived value for both tenants and potential buyers.

1930’s – 1950’s

In the 30’s the U.S. started its recovery from the Great Depression, in the 40’s the Second World War broke out, and the 50’s ushered in the “Baby Boom”.  The struggles and triumphs of this 30 year span shaped the layouts of apartments in many interesting ways.

A significant issue investors typically come across when purchasing properties built in this era is the influx of issues caused by the cost-effective construction practices and materials used at the time – and have recently been making headlines.  The biggest culprits being materials containing Asbestos and surfaces covered in lead paint.  Due to the toxicity of these materials they were banned in 1978 from use in the construction of any residential buildings. If there turns out to be either of these properties, but particularly Asbestos, remediation can be costly.

Electrical wiring in properties built during this period also tend to cause a large amount of grief.  Knob-and-tube wiring (sometimes abbreviated as K&T) was an early standardized method for wiring.  Although less expensive at the time in and very popular, this wiring system has been outmoded due to its limited voltage when compared to new standards of wiring.

Also the lack of a “Ground Connection,” caused the National Fire Protection Association (NFPA) to brand the K&T wiring systems as a risk.  This branding will make any multi-unit property with the system in place uninsurable.  Put all this together and a K&T wiring means an automatic need for a rewiring project, which can be expensive.

While there are some serious issues to consider with properties built during these years, there is one major positive: their floorplans are designed to maximize the use of available square footage.  During this era, features such as Murphey Beds, foldaway ironing boards, and other space saving items were all common amenities.  These items have recently regained popularity in urban markets.

1960’s – 1970’s

Development of new property in the 60’s and 70’s was focused on long term construction methods including concrete and glass without much respect for aesthetic appeal.  More often than not, these are the buildings renters and buyers walk by without even a second glance due to the lack of any “eye catching” features.

The main concern with the buildings constructed during this era are the roofs, which are by and large flat, which pose their own set of problems the biggest being that they leak.  There is a reason pitched roofs are popular – they direct the water off the roof eliminating standing water. Flat roofs on the other hand allow standing water to more easily find breaks in the roofing surface which can result in severe damage, particularly in markets with harsh winters. There are repair options for these issues, however, the investment will be much higher for long term fixes.

Another big issue with properties from this era is they’re on the difficult side when it comes to repurposing the property.  The concrete construction makes it much harder to alter the building’s floor plan.

Once you get past the issues which can arise from their concrete slab block designs, the fact is that these buildings are very similar to those which came after 1980.  Normally, they will feature larger bedrooms with adequate closet space and kitchens with sufficient storage space all of which are in high demand in current markets.

In suite utilities also became prevalent during this era.  As furnace, PTAC, and hot water systems were upgraded, many developers found it easier to run separate smaller units in place of larger systems.  This is a great benefit to landlords as it all them to pass utility expenses directly to the renter.

No matter what type of commercial real estate you invest in, the age of a property should always be a consideration when performing the due diligence process.  While older properties normally carry a lower price tag, and likely qualify for tax incentive programs, they have numerous features which can quickly turn into pitfalls. However, they also have certain benefits. Only you can decide where the balance is between charm of the era and risk of potential issues – and don’t forget, every single property is different.

To learn more about additional considerations you will need to take into account when acquiring a multi-unit property, please sign up for one of our upcoming live events.  During the course of these four days, we will cover the numerous items you will need to inspect during the due diligence process for any type of commercial property.

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