Are Older Rentals A Good Investment?
I am just getting started in REI and I only have about $10,000 in cash, but I have excellent credit.
I am tempted to make my money go as far as possible by snatching up some cheap rentals in the Akron area. I'm talking about properties that go for anywhere from $50,000 to $120,000. They are older duplexes and rent for about $350 to $500 per month.
What would you do? Pick one or two nice properties with lower cash flow, decent appreciation and minimal repairs OR several older properties with little/no appreciation, some repairs and better cash flow?
This is a investing strategy that you must choose. No one elses strategy is going to be exactly right for you.
But knowing what you do about it, which would you choose?
In most markets, your older neighborhoods with older buildings, and lower incomes, and higher crimes rates, are generally going to offer the highest return. But the first principle taught in any financial management course is risk vs. return. More risk more return, less risk less return. I would say the properties your likely looking will offer a superior return, but will likely require more management, maybe more repairs, etc.
Me personally, I shy away from most of those areas. My heuristic is "Don' t buy anything I personally wouldn't be willing to live/feel comfortable in"
The one big thing to take into consideration with the older units is repair costs such as a roof. Also at 6.5% $95000 over 30 years comes to around $600/month but $45000 with the same terms comes to $280/month according to one calculator I used (not including taxes, insurance, etc.). The lower priced units will obviously pencil out better given your situation. You might not be able to cover your investment all the way depending on the cost but you could look into where the city has earmarked monies for reinvesting into fringe areas and concentrate there. You might get some better appreciation even if you take a slight negative cash flow.[ Edited by 3qu1ty on Date 06/25/2004 ]
I own a duplex built in the 1930's in a blue collar neighborhood. I financed the purchase 100% with the seller contributing 2% towards closing costs!
My first mortgage is at 7.5% for 30 years, my second is 12% for 15 years!
This property cash flows, even though these are high mortgages! I make a little over $200 per month and about to refinance - this should bring my mortgage payment down about $200...
There is money to be made!
Good Luck!
[addsig]
It seems to be, since you said you are new to REI (and probably new to landlording, repairs, etc.), it would probably be better for your to start off with a couple nicer properties. More properties often times = more repairs and more headaches and more tenants to deal with. If you invest in 1 or 2 nice units and decide this biz isnt for you, it's far easier to bail out than if you have a half dozen or so properties.
Just my 2c, for what it's worth......... :-o
I don't know property in the Akron area, but it would suprise me if you couldn't get decent rentals in decent neighborhoods for that kind of money. Now, it may not be the kind of neighborhood that you would strive to live in, but I would suspect that in the roughest parts of Akron where most of the crime occurs, you could pick up properties for less than $30k. There is one big consideration to make with older buildings though. If you have a large number of tenants, especially in older buildings, there is a fairly good chance that you will have a run in with a personal injury attorney at some point. Accidents will invariably happen, although the attorney will always say that it wouldn't have if you had done more. It's basically what a lot of people refer to as legal extortion. Make certain that you own the properties in a LLC and take out legal insurance which is one of the best deals going in my experience. If you don't have legal insurance they will threaten you with a lawsuit, which could easily cost $25k or more to fight even if you aren't guilty. That usually causes most people to settle the case which is exactly what they had hoped for. If some kid eats some lead paint chips, even if it was at his grandmas house, the lawyer is going to try to say he got it from you house. No matter how hard you try, you can never get rid of every trace of lead. This is just one example of many nightmares that I have heard of through my PM. Fortunately, the worst I have ever had is a broken leg.
Your decision should depend on your needs and goals. If you do not need the cash flow now you may want to go for the higher appreciation. Personally, I buy in both markets. One thing to be careful of is that you don't buy with high negative cash flow in hopes that future appreciation will bail you out. I don't buy anything that does not produce a positive cash flow. You want to structure your financing so that you can hold onto the property indefinitely, assuming that you are not looking for short term quick profits.
There is no simple answer.
In some locations the older properties are the creme of the area and will never quite cash flow. Hence age is not exactly a good indicator of present or future value.
Older properties will have some extra maintenance issues. Either things wearing out or being built to old code that makes for future issues that you might have to upgrade.
A better way to look at things is based on employment and income levels. A broad statement is to stick with bread and butter properties that the average worker can easily afford.
When heading towards extremes in value (high or low) watch out for the difference in cash flow vs. appreciation. Very low end properties might have great cash flow but likely low to flat appreciation. At the very high end you will see really bad cash flow and mixed appreciation.
In all cases hang onto some cash as a buffer for repairs, vacancies, etc.
You could spend some time asking property managers what locations and styles are always in demand.
John
[addsig]
Not sure what you classify as older. I own some duplexes built in 82', 86', 87'... they bring similar rents to some decent sfhs I have built anywhere from 1930s-1970s. Duplexes were $71-78k and rented for $450 per side (neglected repairs/mainteance). I put a lot of paint time in... and some repairs/upgrades and have all the rents moved up to $495-$520 now (and tenant class cleaned up). They have worked out well, and you can probably do well in this market also, keep some of your cash, upgrades or unexpected repairs can end up costing more than you plan on. I value most properties of this type at 7x annual income (gross), and try to buy at a discount to that. Make sure you are comfortable dealing with the class of tenant the property will attract, the repairs/upgraded I did not only moved up rents, but enabled me to bring in better tenants.
But cash flow is too easy a term to throw around. And it's directly related to down payment. You can create cash flow on any property.
The question is one of ratio. How much down should you invest for the return. Since the rent rate is fairly "constant" the question of LTV becomes a big one.
According to the mort calculator for a $600 monthly note under different down payment scenarios you can buy:
Mort. pmt: Down Pmt: Property:
----------------------------------------------------
600/mo 20% $112k
600/mo 10% $100k
600/mo 5% $ 95k
Your cash flow is the same for each case. Your rate of return on cash is not.