Investment Strategies The Investor’s Guide to Condominium Conversions by Julia Vincent November 30, 2021November 30, 2021 by Julia Vincent November 30, 2021November 30, 2021 What are condominium conversions? keep reading as we break down this concept and walk you through the process of getting involved in these projects. What is a Condominium Conversion? A condominium conversion is when rental apartments are converted into condominium units. People living in rental apartments lease these apartments while people living in condominium units own their units. These unit conversions can take place in any residential building in which the tenants live in separated units. This includes apartment buildings and cooperative buildings or co-ops, where the tenants are also partially the owners of the entire building. Additionally, you can convert multi-family homes into condominiums as well. When condominium conversions take place not only is every unit converted into a condo but these condo owners become partial owners of shared spaces in the building, such as pools, common areas, or building gyms. Condominium conversions are done by building owners or real estate investors to increase their profit revenue. In terms of residential spaces, it typically costs more to purchase a condo than to rent an apartment, and, in most cases, any residential space with separated units is turned into a condo when that unit would make more money more individually than as a rental or multi-family space. This is the biggest incentive for building owners and real estate investors to convert apartments into condos. This idea of converting your residential spaces into single units for sale began in the 1960s after the state “horizontal property” Act. These acts meant that condominiums could qualify for FHA insurance and special mortgages to finance the sales of individual units. Additionally, the horizontal property acts created laws in which ownership is recognized between vertical walls and horizontal levels above the ground. This is primarily for the purposes of establishing property taxes, deeds, and any incident dealing with property ownership. Lastly, in these horizontal property acts, there are laws that establish no discrimination against condo ownership and zoning laws. When to do a Condominium Conversion? Although there are many individual factors to look at when thinking about doing a condo conversion, the first reason building owners and real estate investors choose to do a condominium conversion is to increase their overall profits. Anytime in which an apartment rental or a multi-family space would make more money individually, they are often converted into condos or single living units. To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here. Even though this may seem simple enough, there are certain aspects to consider before converting your residential spaces into condominiums. Below will discuss the 6 most important factors. Consulting with a Legal Expert Before you officially decide to convert any building spaces into condos, you should speak with an attorney who specializes in real estate. They will be able to educate you on any state laws or local laws that could impact your condo conversion process. Additionally, an attorney could provide you with a step-by-step procedure to follow when you are physically converting your buildings into condo units. Financing In order to convert your spaces into condo units, you will need the proper financing to make this transformation happen. Speaking with a mortgage broker prior to the start of this project can help you secure the necessary financing. A mortgage broker who specializes in condominium conversions can help you figure out specific costs of certain loans such as debts, interest rates, loan terms, and closing costs. All of this should take place prior to the deal being placed under contract. Vacating the Property One of the biggest problems expressed by building owners or real-estate investors who are considering a condo conversion is vacating the current tenants from the residential building. There are laws in place that protect the rights of the people who currently reside in these spaces. Typically, there is a specific time frame that is given to current residents in which they have to relocate. Sometimes, it could be the investor or owner’s responsibility to provide these relocation costs or offer them the opportunity to purchase the condo once the unit is completed. Hidden Fees Before beginning your condominium conversion, you should be aware of possible hidden fees. Some of the fees that could occur before your renovation starts are: Application fees Attorney fees Survey fees City fees Code compliance fees Even after your condo conversion is completed there are hidden fees to look out for: Code violation City inspection Private condo pre-inspection specialist Insurance costs Upfront and backend fees Being aware of all of these fees before you even begin converting apartments into condos is essential so you know how to budget your finances correctly and be prepared for all changes. Sales Processes After your condominium conversion has been completed, you will need to sell those units. You may need to invest in outside marketing specialists to help promote your condo units to the local area or wherever you feel necessary. Additionally, there will be after-repair values of the condo units, which needs a sales comparable analysis. Partner Compensation One of the final things to consider is what sort of compensation structure is offered to individuals who may invest in your company. This includes what kind of return you will offer and when they are paid. Types of return include preferred return and profit split. Steps to Converting your Residential Building into Condominiums Now that we have discussed what a condo conversion is and important factors to consider while deciding if a condominium conversion is right for you and your building, now we can look at the steps involved in converting your space into individual condo units. Step 1 Before you begin any physical aspect of your condo conversion, you need to meet with some professionals in different areas to help you understand all the legal and financial aspects of a condo conversion. Meeting with an attorney who specializes in real estate will help guide you through any legalities of a condo conversion. Additionally, meeting with a mortgage broker will guide you on how to finance this project. Step 2 The first step to the actual conversion process is dividing up the spaces in your residential building. In this division, all areas need to be split up into individual units. In the case there are shared walls, recreational facilities such as a pool or gym, and common areas like a lobby, those spaces will need to be clearly defined as to the individual condo owner’s share of each space. During this division process, you will need approval from the city, and local government. Certain cities have special forms for condominiums, wherever you are dividing the space already available in a residential building or you are building a new residential structure specifically for condominiums. In this step, you will come across application fees, consultation fees, and city fees. Once your plan has been approved by the city, you are able to continue to the second step. Step 3 Once you have these plans approved by your local city you need to register the condominium building with the land registry office. When you submit this application, you will need to include the declaration. The declaration consists of the condominium description, the layout plans, and any surveys of the land. There is no way of knowing if your plans will be approved or denied. That is why it is essential to seek professionals in step one to help with all of these aspects to ensure your application gets approved. If it is denied, it will be costly to try to revise them and additionally take a lot of time. Step 4 If your application is approved by the land registry office, then you are able to start building your condominium complex or renovating your current building. Your plans will be essential in this step to help you create well-designed condo units. Construction and labor fees will be present in this step along with purchases for interior aesthetics. What are the Advantages of a Condominium Conversion? Below will discuss some of the most favorable factors in a condominium conversion: Affordable for First-Time Homeowners: In today’s real estate market purchasing a home can be extremely expensive. Depending on the area you reside in and your budget, most homes in a certain area may be unachievable for some individuals. Condos are a great option for first-time homeowners who are looking to purchase, rather than rent, a place to live. If you are a real estate investor or building owner, investing in a condo conversion might be a great way for you to increase your profit revenue as more people will be interested in affordable housing options. Additionally, you are creating more affordable residential spaces for people to purchase. Condominiums are Flexible: Unlike some spaces in a multi-family home or cooperative building, condos are independent, individual units. These units can be sold, financed, and mortgaged individually without having other spaces impacted. Tax Savings: Depending on your location, you may benefit from potential tax savings. Some areas have different laws surrounding rental properties and condominiums. The Municipal Property Assessment Corporation (MPAC) controls these regulations. In rental properties, gross income is used to calculate taxes while in condominium properties the sum total of a market value for that individual unit is used to calculate taxes. Overall, taxes are usually higher in residential buildings that use renting as their main income source. What are the Disadvantages of a Condominium Conversion? Although there may be many incentives to condominium conversion, it is also important to consider the cons: The Residential Tenancies Act: As mentioned before, there are laws protecting current tenants of rental spaces in buildings that will converge into condominium units. Specifically, the Residential Tenancies Act issues security to current tenants. Typically, current tenants are provided with a certain timespan by which they have to move out or relocate. In some circumstances, the building owner may be responsible to fund their relocation. Before anyone new can move into the completed condo, every law and regulation must be followed in order to obtain the space. Fees for Professionals: It can become costly during the condominium conversion process. Attorneys, mortgage brokers, and real estate agents are necessary to consult before you begin your condo conversion to make sure you are in city law and have the finances to do so. Additionally, individuals from the city will need to approve your plans and land for this conversion to happen. These applications and city inspections have fees. Unknown Time for Conversion: Even if you have a step-by-step, well-thought-out plan of your condo conversion there are many factors that could impact how long the actual process takes. The entire condo conversion process could take any time between a few months to a few years. The longer it takes for the condo conversion, the more expensive it all could get too. No matter how much detail you put in your plans, unexpected factors could change your timeframe in a matter of seconds. Some Areas Discourage Condominium Conversions: Your local city may be against condominiums in the area. Certain restrictions can make it much more difficult to get plans for a condominium conversion approved. Some cities restrict the conversion of buildings unless there are a certain amount of vacancies or won’t approve of condo conversions unless the units created will be sold for above market price. To Recap A condominium conversion is a process of altering a residential building, typically one set up with apartments, a cooperative building, or a multi-family home, and converting it into individual condominium units for sale. During these conversions, all spaces are divided up so they are able to be sold independently of each other. Any spaces such as common areas, lobbies, and recreational facilities are also “sold” to buyers, and every buyer of a condo in that location owns a portion of the shared spaces. Condominium conversions are desired by building owners or real estate investors as it is a way to increase one’s revenues. Typically, condos sold for purchase make more money than rental properties. This factor incentivizes investors to convert residential buildings into condominiums. Mashivor specializes in finding profitable investment properties. To learn more about how Mashvisor can help you find profitable investment properties, schedule a demo. Start Your Investment Property Search! START FREE TRIAL CondoInvestment PortfolioRental Strategies 0 FacebookTwitterGoogle +PinterestLinkedin Julia Vincent Julia is a content writer with a background in marketing. She studied Anthropology and Law & Society at Oberlin College. Previous Post Questions To Ask At An Open House Next Post AirDNA Rentalizer vs. Mashvisor Airbnb Calculator: What is the Best Tool for Investing in Short-Term Rentals? Related Posts Are Property Investment Companies the Way to Go in Real Estate Investing? How Bad Do You Need a Rental Property Calculator? How to Calculate Cap Rate for Rental Properties Most Efficiently How to Choose the Right Rental Property Investment Strategy for You Getting Started in Real Estate: How to Find a Business Partner with Money When Should You Remortgage to Buy Another Property in Real Estate Investing? 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