Oct 13, 2023
There’s been plenty of talk about converting vacant office buildings into residential units. And recently a trio from Pennsylvania decided to get more ambitious, converting an abandoned school building into an apartment complex.
Real estate investors Jesse Wig, Adam Colucci and Dan Spanovich found an off-market deal to purchase Bowtie High, an abandoned high school, for $100,000 in 2019. Spanovich, a 42-year-old developer, helped his co-investors convert the dilapidated property into a massive apartment complex.
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A hefty $3.3 million later, the site is a 31-unit apartment complex.
One-bed and two-bed units start at $1,400 and $1,600, respectively, and the property is already at 100% occupancy.
The project was so successful, the trio have already reinvested some of the profits into another abandoned school nearby, intending to convert it into another apartment complex with 33 units.
The Bowtie High experiment highlights some key trends of the U.S. housing market that investors need to know before making their next real-estate move.
Housing supply shortage
According to multiple media reports, there are simply not enough homes being built to keep pace with the U.S. population.
Between 2012 and 2022, the number of single-family housing starts trailed the number of household formations by 6.5 million units, according to Realtor.com.
And that shortage also applies to the existing home inventory. Just last week, Realtor.com reported a "bleak lack of inventory" for prospective homebuyers earlier this month with the number of new listings down 7.1% compared to a year ago and overall inventory of both new and old listings down by 5.1%.
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This housing shortage is expected to persist in the years ahead. This is why the conversion of commercial properties such as schools and offices into residential units is highly attractive.
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Passive income
Given that Bowtie High has 31 units occupied at between $1,400 and $1,600 a month, the property generates more than $500,000 in annual rent. That implies a gross return of around 15% on the trio’s total investment of more than $3 million. That’s an incredible return, but it took months of sweat and tears to get there.
Fortunately, investors can generate passive income from real estate using online platforms and avoid the hassle of real estate development and renovation.
Residential real estate investment trusts (REITs) like Camden Property Trust (NYSE:CPT) and Mid-America Apartment Communities, Inc. (NYSE:MAA) offer dividend yields of 3.7% to 3.8%.
That’s not as lucrative as the Bowtie High project but involves significantly less work and risk. For the average investor looking to put money to work and generate a steady passive income, REITs are certainly attractive for almost any investor.
Tax incentives
Wig, Colucci and Spanovich qualified for tax credits because they were renovating a historic building that had been abandoned for over 10 years. Both the state of Pennsylvania and the federal government offer various incentives for these types of projects.
The team decided to double-down on this strategy by reusing some of the old doors, hardwood and bookshelves from the former school to furnish their new apartment complex. Reclaimed vintage furniture adds more character to the building.
Historic restoration isn’t the only way to secure tax credits for real estate investments. Government programs such as Opportunity Zones and the Residential Clean Energy Credit can also help you lower the cost of renovation projects.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
