It invariably takes a mixture of skills to complete a complex task and this requirement predicates teamwork. So what happens if you have a real estate opportunity but no team to help bring it all to life? An opportunity will forever remain just that unless you're able to implement and deliver on an effective plan. By way of example, let me introduce you to David - that's not his real name - but his is a real and recent, ongoing project underway in downtown Charleston SC.
David has known us for a number of years, attending events that we have hosted from time to time, such as the opening gala after our renovation of the Gadsden House on East Bay Street. About 8 years ago, his family purchased a property on upper St Philip St in downtown Charleston SC, financed with a home loan. The property came with title issues and it took some 7 years to resolve these. The histric home is derelict and in a poor state of repair. David posed the question to us of what he should do at this point in time?
We operate a Real Estate brokerage so, given prevailing market conditions, a quick answer would be to sell whilst the opportunity exists. However, a quick answer is not necessarily a good one or in his best interests. So we asked for some time to think about it. Here are the facts as we reasoned:
- the property is in the "accommodation overlay zone" in Elliotborough. It is Zoned GB - General Business. With this zoning designation it can be legally used as private residential, monthly rental, short term rental or business purposes.
- there remained some issues with the property boundary and just where it lay with regard to adjoining land owned by SCDOT (South Carolina Department of Transportation).
- the lot was long and thin but insufficient in size for an additional dependency given Zoning regulations.
- the main house was in a poor state of repair having been empty for over 20 years but not in immediate danger of collapse.
- David has a low "basis" in the building, meaning it was worth considerably more than he paid for it and servicing the debt was not comfortable.
So the first consideration was to model how the property would perform as a rental. Due to its size and location, business useage was not considered further. A previous blog discussed the returns available from residential rental as long term, monthly and short term. Short term rental is often the highest return available and we have similar properties in the locality to act as a model for how it would perform. The results looked promising given the likely refurbishment costs and the existing mortgage debt.
We then consulted historic records dating back to the 1960's when the Hwy 17 Crosstown was first planned. Discussions with SCDOT resulted in an additional 20 feet of land being added to the rear of the lot as the City records of the tax platt were in error. This increased the lot area to over 4000 sq. ft. allowing for construction of an additional dependency in the rear within City defined lot occupation and setback limits. If one property as a short term rental would perform well, 2 would considerably improve on that. The City of Charleston Zoning department concurred in principal with our proposals.
The best decisions are always made on the basis of fact and it sometimes takes a while to gather sufficient detail. Our proposal to David was as follows:
- Do not sell the property. The best return ongoing would be from developing it as one or preferably two, short term rentals. We will manage these through our short term vacation rental business (Luxury Simplified Retreats).
- David did not want to take on additional debt so we offered to raise the necessary capital and to undertake the project for both homes through our construction arm (Luxury Simplified Construction). Construction finance has been agreed with BNC Bank. The remaining timeline for planning is about 4 months and an additional 8 months of construction.
- The legal structure for this would be as an LLC (Limited Liability Company). David would become a minority partner with suitable legal protections. His stake would be just under 20% so the bank would not require any personal guarantees as part of the financing. As such he would be relieved of the existing mortgage and gain a sizable cash sum payment whilst retaining a <20% ownership in a healthy cash-flowing asset going forward. Returns are predicted at approx. 20% (IRR, levered).
NOTE: Good teamwork is often the route to a great result. We have a happy client who will be relieved of a mortgage debt, has additional cash in his bank account and ongoing income from retaining part ownership in a valuable, legal short term rental asset. A collaborative partnership that offers advantages to all involved.