Believe it or not, a lot of work goes into real estate projects–in particular, the decision over whether a property should be renovated and refurbished, or demolished outright to make way for another structure. Personally, I much prefer renovation and refurbishment: I find it more cost-effective and efficient, and I’ve made much of my career in the renovate/rehab niche as well.

All the same, there are a lot of factors to consider before you decide one way or another. A lot of these circumstances are local, and specific to the city (or town) where your property is located. This includes zoning ordinances, building costs, and barriers to entry, to name a few.

 

Financial and Legal Constraints

As I’ve written previously, much of the decision to refurbish or rebuild will come down to costs. Many of the biggest cities, such as San Francisco, Washington DC, or New York, will have extremely high building costs. For instance, in 2015, the cost of building in New York was twice the national average, a result of a 5 percent increase over three consecutive years.

Yet all too often, high costs and heavy regulation go hand-in-hand: construction rates are expensive in large part because permits are pricey and legal restrictions are significant. For example, New York City’s zoning code is extremely convoluted, varying from one neighborhood to the next: experts estimate that some 40 percent of existing, vintage buildings would not be able to be constructed today. For these reasons, such real estate markets are dominated by a handful of powerful real estate developers.

Given these sky-high costs, it makes much more sense in some areas in renovate, rather than rebuild. Doing so will allow you to avoid the maze of paperwork–and its attendant expenses.

 

Historical Buildings and Structures

Yet another situation where it might make more sense to renovate (rather than rebuild) is when investors are dealing with storied, vintage buildings. I’ve had the pleasure of working on several such projects in the past, and in my experience, it’s a mistake to tear down a grand old beauty and replace it with yet another soulless, glass-and-steel structure.

True, exceptions might have to be made in some cases (perhaps if the building is too old or dilapidated, worn beyond repair). But for the most part, barring any massive structural issues, you’ll be doing the community (and your wallet) a favor by restoring and rehabbing these beautiful, classic apartments–especially if they sit in an area where property rates (and thus, desirability) are rising.

Take the case of Aurora, Illinois. Situated west of Chicago, this city of nearly 200,000 is a rising star–home to a flourishing economy as well as a rich history, expressed through buildings designed by architectural visionaries like Frank Lloyd Wright and Bruce Goff. The city now is the most affordable housing market in the nation (as named by Realtor.com), and one of the best run cities in the country.

Back in the early 2000s, I had the opportunity to pick up a vintage, 34-unit apartment building in an Aurora neighborhood, one that largely consisted of Victorian-style, single-family homes. All of my initial misgivings evaporated when I visited the property: located at the center of Aurora’s historic district, the building had seen better days–but importantly, was a perfect candidate for a renovation. The grounds were brown and poorly maintained, the common area and halls were chipped and faded, and the apartments themselves were worn out and crumbling.

Our efforts were extensive, leaving nothing untouched. We redid the grounds, hiring a landscaping crew to plant flowerbeds, grasses, and other plants; we hired crews to redo the masonry, cleaning the brick, repainting it white, and applying a clean, chemical treatment; and we renovated the interiors, dealing with everything from worn carpeting to replacing water pipes. In the end, we sold the historic property for a net profit that exceeded half-a-million dollars, and moreover, won the Vintage Property of the Year Award from the Chicagoland Apartment Association.

 

Government Programs

Lastly, don’t forget government programs and incentives. Often, local governments will favor real estate developers and investors with significant benefits, which often take the form of low (or no) taxes. These programs generally tend to be quite specific: some may favor refurbishment, while others may be aimed at rebuilding.

Take Lancaster, a small city in the rural heart of Pennsylvania Dutch country. The area has seen an uptick in economic growth, but concerned about its various boroughs, officials have offered generous tax incentives for developers and investors, centered around refurbishing existing structures, rather than building new ones. For instance, property owners who add $100,000 in improvements would be exempt from taxes for one year, with taxes on property value being instated gradually over a period of 10 years.

Lancaster isn’t alone. Similar programs are in effect all across the country, especially in rust belt cities in Michigan and upstate New York. Where they exist, such initiatives are a boon to both the local economy and investors: residents get better apartments and a higher standard of living, while investors turn a profit and, along the way, give back to the community.

 

Ultimately, refurbishing or rebuilding is a heavy decision, and not one to be taken lightly. Given the patchwork of state, local, and federal legislation, it’s important to do your research. Two markets within the same state can vary widely–to say nothing of two markets within the same nation. Still, the right decision can pay off in more ways than one.

Good luck!

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