Very old properties (~100 yrs) - missed opportunities or risk minimization?

[Nir]

Hello Everyone,

Based on feedback I get from a few investors, real estate investors prefer NOT to purchase very old properties.

Don Campbell`s GREAT system is teaching us to focus on positive cash flow in addition to appreciation.

Therefore, why are experienced investors not even considering MUCH older properties (even 100 years old) although they can potentially generate MUCH higher cash flow?

For many very old properties, especially duplexes and triplexes, rent to purchase price ratio is 15%(!), CAP rate 8%(!)

I understand the risk and potential "headaches" due to high maintenance costs. However, a detailed inspection done by a certified home inspector (recommended anyway) is supposed to mitigate that risk. Is it not possible that some very old properties are actually in a good condition?

THANKS,
Neil

 

[grantala]

Sure there are some very old properties that are in good condition. Why go through so many to find one?
Is the MUCH higher cash flow going to make up for the MUCH more amount of your time? (which also costs money)

Remember that inspectors don`t have x-ray vision.

Issues like wiring and insulation are never cheap to remedy if required. I`m sure that if you start asking for insurance quotes on a 100yr old property, your going to find out pretty quickly that you have some obstacles to overcome (and if not, a higher rate).

 

[markl]

I am a big fan of 100 year old properties in Toronto. Most of these are double brick non insulated jerry rigged messes that leave tremendous opportunity to come in and do a little cosmo work and get some fairly decent rents as they are ussually large enough to suite and if they haven`t fallen down yet then they probably won`t.

I also think they the old victorians look good and help increase my rents with their curb appeal.

That`s what is great about RE there is something for everybody

Regards,

 

[PeterKinchMortgageTeam]

QUOTE (investmart @ Apr 14 2008, 03:47 PM) Hello Everyone,

Based on feedback I get from a few investors, real estate investors prefer NOT to purchase very old properties.

Don Campbell`s GREAT system is teaching us to focus on positive cash flow in addition to appreciation.

Therefore, why are experienced investors not even considering MUCH older properties (even 100 years old) although they can potentially generate MUCH higher cash flow?

For many very old properties, especially duplexes and triplexes, rent to purchase price ratio is 15%(!), CAP rate 8%(!)

I understand the risk and potential "headaches" due to high maintenance costs. However, a detailed inspection done by a certified home inspector (recommended anyway) is supposed to mitigate that risk? Is it not possible that some very old properties are actually in a good condition?

THANKS,
Neil


You may run into some financing issues with very old properties. If the property is in decent condition (habitable), you`ll probably be able to find a lender with little difficulty, however your amoritization will suffer. We`ve financed many older properties with great potential cashflow for investors intending to fix them up, though in many cases its been with a 10 or 15 year amoritization. Keep that in mind when you`re calculating your cashflow.

With substantial renovations however, its not too difficult to get the amoritization back up to 25 years.

 

[terri]

I ONLY buy very old buildings, the newest one I ever owned was from 1906. Keep in mind that there could be a lot of work involved. I buy old Victorian fixer uppers and spend sometimes $100`s of thousands turning them into beautiful high end suites. This is the only way that I can be sure that the plumbing/electrical/heating etc is going to work okay. The renovations can take anywhere up to a year to complete, but this is what I love doing, but I`m sure from an investment stand point it`s not what most investors want to get themselves into.

There`s a lot more due diligence involved in something like this, especially when you are dealing with single family properties that were converted into apts 50 yrs ago, there`s issues about legal suites, renos can get expensive because you never know what`s going on behind the wall and there could be a long period of time where it`s vacant and there`s no money coming in. If it`s vacant for even a couple fo months while you renovate, you`re probably look ing at negative cash flow for the first year, maybe not such a great deal after all. That being said, I love them.

Terri

 

[Nir]

Thank you everyone for the interesting responses!

Although there are significantly different opinions regarding very old properties, you all have good reasons to invest (or not invest) the way you do and that`s most important.

My approach is similar to Mark Loeffler`s. Although Terri’s approach can generate very high returns I prefer not to spend (or: risk in my case) so much.

Peter, I think some banks (RBC for example) will have no issue providing 40 years amortization for 100 yrs old property.

Regards,
Neil

 

[PeterKinchMortgageTeam]

QUOTE (investmart @ Apr 15 2008, 10:23 AM) Thank you everyone for the interesting responses!

Although there are significantly different opinions regarding very old properties, you all have good reasons to invest (or not invest) the way you do and that`s most important.

My approach is similar to Mark Loeffler`s. Although Terri`s approach can generate very high returns I prefer not to spend (or: risk in my case) so much.

Peter, I think some banks (RBC for example) will have no issue providing 40 years amortization for 100 yrs old property.

Regards,
Neil

True - though, as always, it will depend on the property. The amoritization is a factor of the remaining economic life. If the appraiser thinks that it a remaining life of 45 or 50 years, most banks will provide a 40 year amoritization. If the remaining economic life is less, the amoritization will be reduced.

There are other options to consider as well, if the amoritization is too short ask the lender if they will consider an LOC, or perhaps a blend refinance if the property is being renovated