Buying out the landlord: Turning multifamily units into a single home pays off in the long run

There used to be a sharp divide between the commercial world of multi-family real estate and the white picket fence dream of a family living their lives in a single-family house.

But, just as with broadcast news standards or appropriate business attire, the rules around what constitutes a family home keep changing.

Boomerang buildings

It’s not news that grand old manors — or even modest but relatively spacious brownstones — get subdivided into multi-family units. This kind of rehabbing has been going on since at least the 1940s and typically provides living spaces for two or three or possibly four or more households. This might pale in comparison to the bouquets of new towers sprouting in city centers across America but, considering how tight the housing market remains, every little bit counts.

Which is why it’s troubling that so many buildings are moving the other direction. Homes that had once been single-family and subsequently divvied into duplexes, triplexes or quadplexes are boomeranging back into single units. Occasionally, even homes that were originally constructed as twins or row houses are losing their dividing walls. This countercurrent appears to have sprung up around 2013, started getting some press coverage in 2016, and has just kept building steam ever since.

To those in the real estate business, this might seem absurd: buying a building that could be generating passive revenue every month just for a little more space and privacy. I mean, why not just buy a detached home to begin with?

There are three answers to this: Location, location, location. Sometimes, if you’re trying to find a place near but not in an urban core, row homes and duplexes are just the housing stock available.

Second, why hire movers? If you already live in one of the units and you have a cordial relationship with owners, why not just buy them out when you’re ready to upsize rather than pack everything up and move out past the airport? If you don’t mind waiting until your neighbor’s lease is up, this might just be the sensible thing to do.

Lastly: a little more space and privacy. You can effectively eliminate disagreements about parking or taking care of the yard.

Deferring cash

And those who convert multifamily buildings into their own private domain shouldn’t bewail the loss of potential income. As New York-centric The Real Deal reports, they’ll get their money on the back end.

“Such homes have higher average price per square foot than two-family and three-to five family homes,” according to Dusica Sue Malesevic’s 2016 article citing appraisal firm Miller Samuel. “Last year [2015], the average price per square foot for single-family homes in Manhattan was $2,137 while it was $1,584 for or a two-family home, and $1,371 for a three- to five-family home.”

These urban homesteads generally range from 3,000 to 6,000 square feet. That is to say, it’s like having a suburban colonial a block from the subway.

Malesevic goes on to state that “the price increase was partially attributed to the well-established trend of multi-family homes being purchased for conversion into single-family homes.”

“It isn’t just individual buyers who are renovating multifamily buildings into single-family homes, either. Developers are getting in on the action, too,” according to a 2016 article in Professional Builder. “Greystone Development development paid $10.45 million for a New York apartment building in the West Village and spent two years renovating the10 apartments into a 7,000-square-foot, six-bedroom home. The property then sold the same day it was staged for $21 million.”

You can’t fight City Hall, but maybe you’re on the same side

That premium is due, of course, to scarcity and desirability — which has municipalities struggling to keep up from a policy perspective. For the longest time, communities have wanted to reduce population density and have zoned for single-family use exclusively. Depending on whom you were related to, you could get an easement to convert a garage into a guest cottage or your basement into an off-campus rental for college students. But there was no way City Hall was going to let you convert your Cape Dutch into three units for income while you retire to Sarasota.

But as the housing market continues its constriction, the public might be better served by having more units rather than fewer. Of course, it takes elected officials a long time to get the message and their deep municipality functionaries a long time to administer changes based on new direction. So, for the time being, it doesn’t appear to be much of a permitting issue to turn a multifamily building into a single-family home. But sooner or later, City Hall is bound to wise up. If you’re thinking of doing this, you might want to do it now.