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Real estate investor rehabs the 'worst of the worst'

May 13, 2006|By PENNY GOLDSTEIN of HomeSource

Bob Johnson chuckles when he recalls some of the conventional wisdom about making money in real estate. What the novice investor is advised to buy, he says, are "paint and powder" fixer-uppers. In his experience, finding properties that can be turned around for a profit after just some cosmetic work are few and far between.

Instead, Johnson, through his company, Shiloh Properties, invests in a different segment of the market.

"We like 'em big, ugly, and empty," he said. "We tend to tackle the places where others would say, 'bring on the bulldozers.'"

Johnson, of Frederick, Md., is about to buy his eighth property in Hagerstown. He also has two projects under way in Mercersburg, Pa. With his son, Matt, as general contractor, he typically guts the properties and rebuilds them with modern floor plans and amenities.

A computer security consultant for a government contractor, Johnson says he's been fixing up his own homes as long as he can remember. He's always been an avid viewer of "This Old House" and other home improvement programs and has also volunteered for Habitat for Humanity. When he started thinking of ways to invest money for retirement, real estate seemed like the best choice.

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"I wanted a hands-on investment, where I'd have some control," he said.

The investor saw an opportunity in Hagerstown in neighborhoods that have been rezoned from multiple units back to single-family residences. Large homes built in the late 1800s and early 1900s for the city's professionals and merchants were divided into multiple apartments decades later when the neighborhoods' demographics changed. Converting them back to single-family homes is not something everyone wants to tackle, but Johnson says he's found it profitable.

At a recent open house for one of Shiloh's rehabbed properties at 861 Virginia Ave., father and son pointed out that while the home's interior and mechanicals had been thoroughly updated, they had also reproduced some elements of the original construction, such as deep baseboards, wide moldings around windows, and an Arts and Crafts style stair banister. There were other "old house" features, too, such as a floor with a slight rise and dip.

"These old houses will tell you what they will let you do to them," Bob Johnson explains.

As an example, both men spoke of their experience with the project they've dubbed "Titanic." Last year, Shiloh Properies purchased 214 through 218 N. Potomac St. The building at 214 was originally a five-bay town house, built in 1887. The City Directory of 1893 shows that it was the residence of Theo F. Young, a fence builder. The home at 218 belonged to John Randall, publisher of the directory. Over the years someone had added on to 214 and joined the properties into a tenement of 13 apartments. When the Johnsons saw it, it had been vacant for 14 years. Vandals had set it on fire. A tree had fallen through the roof, and weeds were growing inside.

From a structural standpoint, however, the worst problem was that a previous owner had cut a doorway in the center of the main load-bearing wall in the basement of one of the homes.

As a result, the floors upstairs had settled some three inches, and sloped toward the center of the house. The solution was to jack up the floor and insert concrete piers for support. But Matt Johnson said they were only able to raise the floor 1/8 of an inch per day. Any more than that, and the house protested with plenty of creaking and cracking.

Matt Johnson now lives at 218 N. Potomac. The exterior has been restored, as the property lies within the Potomac-Broadway Historic District. Inside, his townhouse is a modern five-bedroom, three-and-a-half bath home; 3,000 square feet with elegant 11-foot ceilings. But Johnson noted that it took seven men, working eight hours a day for eight weeks, to do the demolition.

"Our dump and roll-off fees were about $30,000," he recalled. "We had 140 tons of debris."

Bob Johnson said that the 15 months it took to rehab the Potomac Street property was considerably more time than most investors plan on. Typically, he likes to turn properties around in four to seven months. But, he says, his first project also took twice as long as he'd planned, and netted a profit of only $4,000.

Laughing, he said, "We called that one 'going to school,' Everyone says, if you make any money at all on your first house, you're ahead of the game."

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