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The Pursuit: The Columbia Heights Money Pit

by Shilpi Paul

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Zoe Jones new block.

Zoe Jones * and her husband loved living in Columbia Heights, but with the arrival of a new baby, space was getting tight in their two-bedroom condo. As they set about looking for a larger home, they realized that the only way they could stay in the neighborhood would be if they were able to offset the mortgage by renting out portions of a new home.

“I knew we couldn’t afford a full house in the neighborhood on our own,” Jones calculated.

Homes with basement rentals are prevalent in Columbia Heights, but as Jones and her husband searched, they wondered if they could take their rental plan a step further. Many rowhouses in Columbia Heights are on the larger size; could she divide up the home and rent out two, or maybe three other units?

This prospect started to become more realistic when Jones and her husband decided to go the 203(k) loan route, which would help cover the cost of a renovation in addition to financing the home. The numbers seemed almost too good to be true. Jones could put down as little as 3.5 percent of the total purchase price, borrow money to divide and renovate the house into separate units, and then end up with a monthly balance that would be high, but would be completely covered by the rent brought in by tenants.

This past spring, the couple happened upon a property on Craigslist that seemed like it might work: a four-bedroom, two-story home on Girard Street with a legal basement unit and the potential to be divided up further.

Jones contacted the buyer, who was planning to list the home the next day for $899,000. She made an offer of $900,000 as soon as it hit the market; the offer was accepted on the spot.

The renovation plans seemed relatively straightforward. The two upper floors would be divided into separate units and the attic would be extended up and back to create another unit. Once the three units were complete, they hoped to rent them out for between $2,500 and $3,000 a month, which together could cover the just-shy-of-$8,000/month mortgage. Originally, the plan was that Jones and her family would live in one of the upper level units, but the way that the costs worked out, it soon became evident that living in the basement would make more sense.

They hired a contractor and planned out their renovation in detail for the bank, which needed an itemized budget before approving the loan. The bank ultimately loaned them $270,000 for the renovation costs.

While the prospect of being income-positive was appealing, Jones and her husband ran into complications almost immediately after closing.

“Getting the city permits for the work has been hell,” said Jones. She only secured permits a couple weeks ago, a full three months after closing. Her contractor also took a vacation, and work hasn’t been progressing as quickly as she’d hoped. Currently, she estimates that tenant move-ins could occur in January; at that point they will have carried the $8,000 a month costs for six months without any way to defer the costs.

To compound an already frustrating situation, the renovation is proving to be more expensive than the couple anticipated. Because the 203(k) loan is designed to cover a basic renovation, payment for any higher-end products needs to come from the owners.

For example, the loan provides about $100 per bathtub. However, Jones was hoping to furnish the bathrooms with clawfoot tubs; the best offer she has received for a finished clawfoot tub is about $600, and most cost about $1,000. So, she and her husband have been scrambling to find used or salvaged materials from places like Community Forklift that fit their taste level and would allow them to rent the units for a price point that works for their budget. Of course, the hunt for materials only adds to the overall timeline of the project.

Jones estimates that the renovation will end up costing a total of $370,000, or $100,000 over the amount of the loan. The mounting cost and outflow of cash has, needless to say, been stressful.

“This house drinks cash like a thirsty cow drinks water,” lamented Jones. “I see now why people don’t routinely do this. In the long run, it’ll be worth it, but you need to be somewhat liquid in the interim.”

So, would she recommend going this route to other industrious buyers out there?

“The better plan would be to find a house that looks move-in ready, or only needs a facelift,” Jones said. “Then the carrying time and costs would be less. It’s going to take us a while to recoup the money that we had to shell out during this period.”

* Name has been changed at the subject’s request.

See other articles related to: real estate investing, dclofts, columbia heights

This article originally published at http://dc.urbanturf.com/articles/blog/the_pursuit_the_pitfalls_of_amateur_development/7522

19 Comments

  1. Jeff said at 2:39 pm on Wednesday September 11, 2013:

    I’m fully supportive of efforts to build an income producing property and commend their efforts to make it happen, but clawfoot tubs aren’t a common rental trim option and are likely indicative of improperly chosen trim that might not result in higher rent prices or value for the renovation cost from the owners. They got a pretty clear picture of what renovation costs would be covered from their loan and should recognize, that the additional units are income units, not dream homes designed to exact specifications at any cost. It just reinforces that you need to plan for all renovation costs (permitting, holding costs, holding duration, trim levels desired) before you take the leap…

  1. Matt said at 2:43 pm on Wednesday September 11, 2013:

    I’m trying to figure out how they can divide up a 4 bed/ 2 story home into 3 separate units that are still big enough for them to rent out at $2,500 to $3,000 each (even with the owners living in the basement)? Best of luck to the owners but this does indeed sound like a money pit.

  1. Anon said at 2:45 pm on Wednesday September 11, 2013:

    This sounds like some planning up front could’ve helped avoid some of the headaches. The 203K loan would’ve allowed them to build in mortgage payments during the renovation if they opted to do so.  Also, I’m not sure if it’s the program that’s driving the $100/tub or the renovation plan set by the owners. It may be that both of these were the result of needing to squeeze every dime out of the loan for renovation - but that may indicate that they paid too much or are over-leveraged.

  1. Josh said at 3:01 pm on Wednesday September 11, 2013:

    So they want a larger home for their expanding family and end up with a plan to live in the basement and be landlords to 3 upstairs neighbors—this sounds troubling.

  1. Found said at 3:05 pm on Wednesday September 11, 2013:

    @Matt,

    If they are able to bump out the attic, I think three two-bedroom units should certainly be doable. Projects like this are now all over Col Hts.

    I wish them luck, despite the complications so far!

  1. hoos30 said at 3:07 pm on Wednesday September 11, 2013:

    Just turn off the HDTV. Plan sounds like a disaster in the making.

  1. C said at 3:16 pm on Wednesday September 11, 2013:

    I just wanted to come and say that I wish the owners the best of luck for the future of their project and their dreams of expanding their home.  It would be easy to come and say they should have done this or seen this or planned for that - and while renovations can be more complicated (even when predicted well), I think it’s troubling to come and second-guess.  They are coming to share their experience and perhaps help others to learn from what they are going through.  Hind sight is always perfect, of course. 

    These things are always challenging, so I hope that they are able to see it to where they are satisfied.

  1. wow said at 3:34 pm on Wednesday September 11, 2013:

    best of luck - but I question the financial acumen of a couple that thinks a clawfoot tub is a necessary component of a renovation.

  1. Lisa said at 3:35 pm on Wednesday September 11, 2013:

    Josh makes an excellent point—if a two bedroom condo was too cramped, how is moving into a basement a better deal for the family?

    Sounds like someone didn’t do enough research into construction costs, and the ins and out of the 203k program. Hope it works out for them. $8k a month would be crippling to most.

  1. Matt said at 4:18 pm on Wednesday September 11, 2013:

    @Found

    If they can rent those 2 bedrooms out for $2500-$3000 each more power to them but the 2 bedrooms townhouse apartments I regularly see listed for that area are much less than that. They are gonna need those extra posh clawfoot tubs that the rest of these commentators are scoffing at to command such a steep price.

  1. Adam L said at 4:43 pm on Wednesday September 11, 2013:

    More conversion of single-family housing stock into apartments. If only we could build higher to accommodate all the apartments we would need, we’d still have housing for families in an urban, walkable, environment.

  1. anonnn said at 4:46 pm on Wednesday September 11, 2013:

    How would repealing the height act stop people from converting rowhomes into apartments?  There will always be demand for these rowhome apartments, even if there are more big buildings… If for no other reason, then because not everyone wants to live in big, cookie cutter buildings.

  1. Eponymous said at 5:26 pm on Wednesday September 11, 2013:

    @Adam L. Really? Then why is it that we’re seeing an influx of some 50,000 rental units in the DC rental market, and that rental prices are beginning to drop? That hardly tells me that there’s sufficient demand for high rises.

  1. mona said at 5:35 pm on Wednesday September 11, 2013:

    900k for the home that already had a basement apartment. So worst case scenario they didn’t put anything down on the house (unlikely), then they have a mortgage of about 5k for a loan this size at 4.7%(they were less in the spring). So if they had rented out the basement and it was nice and about 2 bedroom they would have gotten 1/2 the mortgage paid per month. What is wrong with that scenario? Why not save that money your not spending on mortgage to buy another place to rent out? Now they are floating a mortgage of 8k/month for 6 months. That is 48k to recoup plus the extra 100k they had to pitch in for construction. Was this really worth it? Did you also think of resale in the future? You will have a school age child and as happens so often in DC people realize they don’t want to pay for private school and DC school aren’t the best,so they move out of the city. Is this house so chopped up that no one may ever want to buy it or will you have to wait forever for the right buyer. Or will you now be a long distant landlord with 4 units in one house trying to juggle a lot of tenants and repairs to a home while you live in the suburbs? Did they really think this through?

  1. mona said at 5:39 pm on Wednesday September 11, 2013:

    Eponymous—- the drop in rental prices is for the large to mid-size building in the city. No one ever does numbers on things like basement rentals or other private rentals. Those have been stable and increasing if you talk to all the landlords in the city. Haven’t heard of anyone doing decreases in rent in the private rental areas. Sometimes people want a yard or don’t want to live in high rise so demand for private home or basement rentals is always there.

  1. Skeptic said at 8:30 pm on Wednesday September 11, 2013:

    What’s the zoning?  Is it R-5-B?  This kind of conversion wouldn’t be legal in R-4, which is mostly how the rowhouses along Girard are zoned.

  1. Vernon said at 10:58 pm on Wednesday September 11, 2013:

    Sorry to hear about the problems that the couple have had and it is my guess that the ultimate return on investment and projected income will make it all worthwhile. As an advocate for the 203k program and as a remodelers and investor who has done many projects using the loan product I will say the following:

    There story is typical of dealing with people through a process they don’t understand. The loan doesn’t decide the value of fixtures or set minimums or maximums its not welfare. If the owner wanted claw foot tubs then they needed to factor that cost into the estimate. Also the home purchase and renovation cost would have to be within FHA lending limits.
    As far as the permit issue goes I agree a good architectural plan and expediter makes all the difference in the world. 

    Check out http://www.homebuytomorrow.com

  1. ben S said at 1:17 am on Thursday September 12, 2013:

    Huh? Is this legal?  Can they really get a C of O for 4 units?  Hello DCRA, care to clarify?  It’s so hard to get a legal basement unit. I don’t get how it’s possible to turn a house into 4 units in that neighborhood. Seems like developers would be doing that to ever house if it were possible because the cash flow makes sense. I don’t get how people would take on such a HUGE project without working through all these details.

  1. Al Terration said at 9:05 pm on Thursday September 12, 2013:

    It seems this couple is trying for the higher end of the rental market.  As someone who deals in that upper end of the market, I know that things like claw foot tubs can translate to higher rents with choosey, persnickety tenants.

    I wish them best of luck as they try to get a custom home from a builders grade budget.  But it is pretty smart of them to try to live for free in their own home.  It is interesting that the people commenting on the size never asked the square footage of the home.

    It would be great to get a 6 month update.

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