Re-building New Orleans and profiting from challenging home refurbishments, with Justin Mills

Q: How did you get started in real estate investing, Justin?

I got into the real estate business in 2005. I’ve always been open to business opportunities and locations with great potential – the book Rich Dad, Poor Dad was an early inspiration – so I decided to move from western Louisiana to Orlando, Florida and received my broker’s license. I focused on a lively niche in Florida, mobile home parks, and sold several for over $1 million.

My first house renovation had a clear, profitable exit. Someone held a property with a main home and a separate, spacious guest house, about 60 feet down a narrow alley. The owner had the idea that someone should be able to split it into two lots, and fix them both up. He didn’t want to invest the time or effort himself. After researching this possibility with the city zoning commission, the deal was very viable. This prior owner had purchased the property for $190K and I bought it from him for about $250K. After a few thousand dollars in legal fees and filings to rezone, some painting and floor finishing, plus a separate driveway, my profit on the two separated homes was roughly $110,000. The deal reinforced for me the value of building relationships with local real estate participants, and I’ve stayed in touch with the original owner ever since.

Q: When did you begin home projects in New Orleans?

My real estate career actually began a few months before Hurricane Katrina. At that point, of course, Florida was a better market to address. By 2012, my wife and I decided to move back to Louisiana. There were probably thousands of homes in New Orleans that were in need of repair – abandoned, suffering from water or termite damage, etc. They took time to be addressed in terms of ownership status and financial situation with the banks, and were coming back online in the market. We saw a major opportunity to be part of that turnaround, and I set up Mig Fund as my development company.

Q: What makes these attractive investments?

A lot of it is location: New Orleans will always be an attractive place for families, professionals, and students, not to mention tourists. A huge hospital facility is being built in downtown, in New Orleans parish. It will cover many city blocks, employ thousands of people and is getting closer to completion.

Because we are at an upward turning point for the city, timing and neighborhood are key investment considerations as well. In one neighborhood, Lake View, an average home that might have cost $90K a few years ago could now be worth $400K. The positive developments and energy in that neighborhood are feeding on themselves. Lake View was always a decent place to live, but now the largest, new construction homes might go for $800K or more. It’s attracting the families of professionals, such as doctors and lawyers, and great restaurants are appearing on more corners. It still feels suburban, but Lake View is just 5 minutes ride by local highway to downtown New Orleans. The Uptown Market district, south of St. Charles to Tulane Ave, is also in demand. These are the types of hot spots I look for.

Q: How do you manage projects involving older homes that may have been exposed to the elements?

I specialize in refurbishing older homes in New Orleans; they can have great potential. I’m fully committed to these types of projects; not many others are. There are many benefits to this approach.

Because there are few buyers for these properties, they often can be acquired for the cost of the land.

You need a good team to plan and budget properly. Given these houses are older vintage, you may be replacing terra cotta pipe with PVC, or completely updating the wiring. I’ll reserve funds wherever needed to replace wood beams, too. My contractors are very familiar with what needs to be done. Some are specialists in terms of skills and related city inspections. Others are experienced handymen that help me with a variety of tasks, from flooring to walls and bathrooms. I always serve as the general contractor, to think creatively about the big picture of beautifying a home, while controlling costs.

We’ll reorganize the floor plan wherever it makes sense. Because older homes here originally didn’t have air-conditioning, they were build railroad style, with no separators between the living areas, bedrooms and kitchen/dining areas and a need to walk through the bedroom to get to the kitchen. We’ll introduce hallways or sliding doors to guide activity in the house, and place the kitchen in the middle, next to the dining/living room area.

Materials are used that make sense for New Orleans today. Exteriors historically were made of wood. Today, the most accepted material is Hardie brand cement lap siding, which gives you a variety of wood looks, at an attractive cost, that weathers conditions well.

Finally, we add modern amenities like granite countertops in the kitchen, and expand the bathrooms.

The financial reward is of course driven by the difference between acquisition and construction costs, versus sales potential. I can usually build additional space at $40/square foot and sell it for $150/square foot. I’m looking at a deal now, where we can add a second story to a home, for a nice potential profit. I’ve had another successful project, a five-plex home, where we reorganized the floor plans of two units, modernized the others, and I’ve held onto it as a rental.

Q: What’s your interest in crowdfunding?

I feel I have a good handle on how to do the projects I’ve mentioned. My next goal is to expand my capabilities, especially access to financing, to sustain several projects at the same time. I’m doing one home flip right now, closing on a single family next week, and planning to close on a four-plex by the end of July. Crowdfunding can help with this vision.

Urban re-development and the Charlotte, NC real estate market, with Kenneth Bell

Developer Kenneth Bell and his partner, Mark Foster, build and refurbish homes in the area of Charlotte, North Carolina. They specialize in “infill development”- rebuilding or enhancing property use within built-up urban areas. In this post, Kenneth explains why investment returns on infill projects can be like “consistently hitting doubles in baseball,” and why Charlotte is a great city for real estate investment and for living – after he spent much of his life in Queens, NY.

Q: Ken, tell us about infill development.

A: Infill is about building, or enhancing, a property within an already-developed, urban area. We do both new development and refurbs, but prefer new construction for a number of reasons.

In addition to looking at the project’s value, there are community and social benefits of infill development. You’re not contributing to suburban sprawl by commercializing open land nearer the edge of the populace, which might destroy elements of the ecosystem. Some people even call our approach to infill “urban refill,” because you’re revitalizing a neighborhood that could otherwise be suffering from empty lots or vacant buildings, and adding value to the neighbor’s homes at the same time.

Q: Why are infill and new construction attractive as an investment ?

A: One reason investment returns can be more consistent with infill than with building in the outer suburbs is that there are more “comps” (comparable sales prices for nearby homes with similar characteristics). With comps and experience, you can closely estimate what an extra 500 square feet, or granite in the kitchen, will bring in home sales price. I look at offering prices and sales in the market every single week, and confer with my team on what features and square feet are selling at what prices. Because we’re building new product, we can offer features like two-car garages that home-buyers love but can’t find anywhere else on the market right now, and achieve a per square foot sale price that’s above most of the surrounding properties. A combination of desirable neighborhood with the best home features is a big reason why investors like our projects.

I believe there’s also more consistency in investment returns with new construction than with refurbishments, or “flips.” There’s only so much visual inspection you can perform on an existing home. There was one house flip I invested in, at an excellent purchase price and a conservative budget we laid aside for enhancements. But once work began, we discovered water damage to the supporting structural elements, and had to tear out the floor. Then we noticed there was termite damage to the main girder and other structural issues followed. It costs $20,000 more to fix than anticipated, which really ate into the investment returns. Adjustments to an existing home in general are challenging – what do you do if the foundation has shifted and the floors aren’t level?

With new construction I feel I can deliver a very solid and fairly reliable return rate. Mark Foster is my construction partner. He’s been in this business since 1993 and together we’ve built a solid, growing business that emphasizes consistent outcomes. My first mentor in real estate told me “it’s nice to get a home run [i.e., outsized profits and IRR] once in a while, but much better as a business to deliver a double or triple every game.” These are some of the reasons I really prefer new home construction, though our team look for good opportunities wherever they arise.

Q: How do building codes affect house fix-ups in old neighborhoods? I once looked at a 1920s tudor where you could see bare copper wire running to the outlets.

You’re right about the wiring; that old, uninsulated approach is called “knob & tube.” Just as with wiring, you’re never sure about what insulation or mold is inside old walls. It may be R-15 insulation value, or the insulation may be totally compromised, when with new, infill construction we build with R-30. Home buyers usually come to appreciate the importance and ROI on quality insulation after they move in and winter arrives, so with the new homes we have that feature built-in.

When a building isn’t up to modern spec, getting city approvals can be unpredictable. With any given old home, the city inspector may decide the current performance insulation, electrical and other utilities is good enough to proceed as is, while with another house the inspector may require a complete overhaul. With the new homes we build, of course, wiring for the digital age and insulation that respects the environment are always included.

Q: You put a lot of emphasis on maintaining the historic feeling of the residence, correct?

A: Absolutely. Most homes we work on were built between 1900 and the 1940s. Historic neighborhoods are very attractive, both because they’re often near many amenities and also because a lot of people like “character” in their home. The challenge, though, with older homes is that the existing structure doesn’t fit modern living needs. For example, older homes don’t have walk-in closets, or open floor plans between the living/dining rooms and kitchen. Garages are separate from the houses, usually down a small alley.

The key is to reflect the style and craftsmanship of the neighborhood while adding modern features to your property. The architectural style we often work in is “bungalow,” featuring front porches and efficient use of space and good ventilation, and clean exterior lines with a steep roof pitch. Most have cedar shingle; sometimes brick is used.

When we build a home in this type of neighborhood, we work with an architect who exclusively designs bungalows, and every home design we create together is unique. Bungalows have oak floors, taller baseboards, and shaker-style cabinets, which we faithfully include. Then we introduce the modern features, including multiple, spacious bathrooms, accommodating closets, and where possible an attached two-car garage. We can side the house with simulated cedar shake to make it attractive yet affordable, and sometimes we’ll use brick as highlight facing for the front porch. We’ll selectively introduce gables or exposed rafter tails, like the original homes in the neighborhood.

Q: What do you like about Charlotte, as a place to live and build?

I grew up in a borough of New York City, in Queens, so I know what the largest cities can offer. My kids, girlfriend Bryn, and I really enjoy the quality of life in Charlotte, though. Many people don’t know that Charlotte has second biggest banking sector in the country; Bryn works in that industry. There are a lot of young professionals here and the population is growing, along with the restaurants and other amenities they enjoy. But there are still the local shops in each neighborhood.

Charlotte is one of the few vibrant and growing cities built around a true central downtown. It has its commercial district, the NASCAR museum, art exhibits and theaters, several major sporting venues, even a light rail, all within walking distance of each other. It’s not like some places that need you to drive to various strip malls and sports centers on the highways’ outskirts. There’s an amazing greenway to stroll through, and participation in bicycling is insane in my neighborhood.

Look, my partners and I could obtain the materials, buy the land, and build a house anywhere. A home’s value isn’t so much about the sticks and bricks. Location is a big part of the reward.