Building Equity

After pouring years of hard work into remodeling and restoration, Jonathan Wallick had a startling realization about a decade ago. "I was dramatically improving my clients' net worth by drastically increasing the value of their property," he says, while he garnered nothing but remodeling fees. That's when Wallick decided to become the client himself.

He launched an aggressive effort to acquire investment properties, and now owns numerous rental buildings. Most are residential rentals, but his holdings also include retail, industrial and institutional properties.

In 2005, Wallick expects his New Orleans company, Wallick Construction & Restoration, to do less than 2 percent of its remodeling for other clients. All the rest of the work will be focused on improving and maintaining the properties he owns — in other words, building his equity.

Wallick's real-estate portfolio ranges from historic structures in tony neighborhoods to modest properties in working-class parts of town, but he uses the same standard for making each purchase decision: The property should pay for itself as soon as it has been renovated.

Finding such a building can take months. "Our market is very tight right now, so people are paying too much for real estate," Wallick explains. His longtime real-estate agent, who understands his criteria and also acts as the leasing agent for his properties, does the initial legwork.

Numbers game

In fall 2004 the agent suggested that Wallick check out a two-story, seven-unit rental property with adjacent cottage. The location was good: a quiet street, a working-class neighborhood, and close to the main road into town, a new streetcar line and a university. The 1911 property, however, was an eyesore.

"It was distressed," says Wallick. "Very poorly maintained, whole patches of weatherboard missing, sewage coming from a second-floor unit into the apartment below. It was bad."

In fact, it scared off most investors. The $290,000 asking price dropped to $250,000 after the property sat on the market a few months. Every potential deal fell through when the buildings were inspected.

Having estimated renovation costs, ownership costs and prevailing rents, Wallick offered $179,000. Another bidder offered more but, like the others, backed out after inspection. The sellers decided to accept Wallick's offer. He inspected the buildings with the help of an electrician, a roofer and a termite inspector. Factoring in the cost of all repairs, termite treatment, plus loan interest and other expenses, Wallick was confident that the property would pay for itself at the price he had offered.

"The property appraised at drastically more with the proposed renovations," he adds, "and could immediately be resold for more than the total invested if necessary." He bought the property on December 2, 2004, and began renovation the next day.

Dramatic turnaround

The 4,200-square-foot wood-frame main building contains six one-bedroom apartments, one 365 square feet and the others ranging from 514 to 648 square feet. All six units needed repair work, some minor and some involving plumbing and electrical overhauls. The apartment below the leaky sewer pipe was in the worst shape, requiring major wall and ceiling repairs.

The two-bedroom, 665-square-foot cottage was "uninhabitable," says Wallick. It had minimal electricity and plumbing, no appliances and a cracked foundation slab. Half the roof was in shambles.

Wallick gave the tenants the option to stay during remodeling. Three did, helped by the fact that Wallick only raised rents about $50 each to keep the building affordable for the neighborhood.

"Some of the tenants were shocked," Wallick recalls. "They said, 'You're actually going to repair that?'"

First on the agenda were the life safety issues in the main building, most notably the space heaters. Code allows bedroom heaters to provide up to 10,000 Btus of heat each, and the gas wall units in the bedrooms of these apartments were hitting 35,000 Btus. Wallick's plumbing contractor immediately replaced all the space heaters with new wall-mounted units with oxygen depletion sensors. The plumber then repaired all the faulty plumbing and replaced two hot water heaters.

Outside, Michael Mansueto — a multi-skilled carpenter and repairperson, and Wallick's one field employee — braced the porch beams, repaired purlins under the porches and repaired the porch steps.

Before doing any interior painting, Wallick gave Mansueto and the plumber time to complete all plumbing, venting, and carpentry repairs throughout the building, put in-wall air conditioning units in several apartments and install a number of new appliances. That way, says Wallick, "we would only need to bring in a painter once."

After the interior was completed, Wallick turned his attention to the exterior. He replaced the roof and switched out the deteriorated weatherboard and stucco exterior with fiber-cement products that would make a durable skin and help seal out termites.

The cottage had to be completely rebuilt, with the roof supported while workers tore out and replaced most walls. The floating slab was replaced with a new slab and new chain wall. With some stabilization and roof repair, Wallick readied a small shed and the four-bay garage to use for storage. Last step in the property improvement process: landscaping.

Payoff

Start to finish, the renovation took six months. "It could have been eight weeks shorter," says Wallick, "except for the delay with the painter."

Based on a referral, he had tried out an exterior painting company that promised to complete the project in just two weeks using a large crew. Seven weeks later, with no end in sight and the painting unfinished, Wallick paid them for what they had completed and hired two other painters to finish the work.

The moment the renovation was completed, the property was worth twice as much as when Wallick bought it. Based on the proposed renovations, an appraiser from the bank had put its worth at $350,000. Since Wallick has been able to command higher rents, he believes the value is even higher.

Cash flow is looking good, too. With a current monthly net income of $865 (see "The Financials"), the property is "right where it ought to be," says Wallick, and "better than the average" as investments go.

Keeping the building shipshape should not be costly or time-consuming. Wallick says his renovated buildings generally require just routine maintenance and repair work.

"It's a good way to support myself and build for retirement," he says, noting that's one of two reasons he holds onto a building as a long-term investment once he's brought it up to snuff. "Rather than sell a building and face surprises with a replacement property," he explains, "it's better to hold an investment that you already know."

Of course, "if the right deal comes along," to sell or buy, Wallick adds, "my options will be open." Spoken like a true investment pro.

Buying and improving a rental fixer-upper brings short-and long-term payoff