Can a Commercial Property be Converted into a Multifamily?

Posted on: August 11, 2021   |   Category: Real Estate
Multi Family Home 1026483 1920

One of the most intuitive investments for a Self Directed IRA is a small multifamily property. The smaller size makes it affordable, the 3-4 units provide a nice amount of rental income, and generally the property requires little more than standard landlord management. However, these kinds of properties are not always so easy to find. What may be available is a vacant commercial property. Would that work for your Self Directed IRA? Is it possible to convert that “perfect sized” commercial building into a residential multifamily? 

This may seem like a particularly attractive option if you do any kind of commuting to work. On the road you’ve probably seen a lot of office buildings that are standing vacant. To a large extent, this is because Covid has been hitting commercial spaces hard. Many businesses, even if they haven’t closed, have found other ways to work that don’t involve coming into the office. As a result, commercial vacancies are quite common. If you already own a Self Directed IRA, it’s hard not to get excited when you pass these great deals. 

This question becomes especially vexing in locations experiencing housing shortages. It’s very hard not to see all these empty buildings and instantly transform them in your mind’s eye into thriving rent-producing properties. You would be able to live the investors dream of “doing good and doing well.” So why aren’t buyers lining up? 

In a recent NBC article, a number of factors were delineated which help explain why the commercial-to-residential transition is not as common as you would think. 

  • Cities want business districts – For city leaders, economy is always the number one concern. It supports local infrastructures, provides a tax base, and helps maintain quality of life. Giving up on business-ready properties and transforming them into a residential haven is definitely not the go-to plan for mayors and city planners. Usually, these leaders would prefer to wait out the current downturn and then jump into the pursuant economic boom. That doesn’t mean the property is not a good investment for your Self Directed IRA; rather you may just have to consider it from a commercial perspective. 
  • Cheaper to build new- In many areas land is still relatively inexpensive. This leads to an economic reality where it is cheaper to build with new construction than it is to convert a pre-existing building. Given that choice, developers will almost always trend to the better business option. (That is good advice for your Self Directed IRA as well.) 
  • Office rent is higher – Office space is usually charged at a higher per square foot rate than an equivalent residential space. That being the case, building owners will often want to hang on to an underperforming commercial property in the hope that the tide will turn.  
  • Bureaucracy – Converting from a commercial property to a residential property is a long process. It involves copious amounts of paperwork, lots of reviews, and can often entail a significant cost. Given the option of starting a frustrating process or just trying to wait out the current downturn, many developers tend to inertia and do nothing. 
  • Non-amenable architecture – Would you consider permanently living in a basement apartment? Most would not and the major factor in that decision is the presence (or lack thereof) of natural light. Now consider a large office building. The offices lining the outer walls are prized for their windows. But what about the office space in the middle of the building? That will usually consist of cubicles or something similar, i.e. spaces without windows. That may pass in a work setting, but it doesn’t fly for residential. Since many modern day office buildings are built wide, it severely limits the amount of space that can be converted into apartments. 

Now you can view those empty buildings on the way to work in a whole new light. However, that doesn’t mean you have to give up hope for your Self Directed IRA. Commercial to residential conversions still happen; it’s just an uphill battle to get them going. If you find a particularly attractive property, start by finding out what it would take to make the conversion. This includes both the governmental regulations, as well as the practical rehab costs. Then, using your knowledge of the local market, pitch the decision makers to show why retaining an empty commercial property will not be beneficial for their bottom line. At the very least you’ll get a solid education in real estate and politics. Even better is scoring the win and bagging an amazing property for your Self Directed IRA.