"property that can't appreciate"

12 Replies

Hey everyone, I'm in my first contract  in the due diligence period and after walking the property and thinking of renting as is for how many years i told the agent if i get the house I'd like to renovate it before i sell to max it's potential. He then tried to tell me that no matter how great i make the house look i won't make a profit off of it during the sale because it's a good rental area but will only appreciate 3%. Every real estate investing book I've read has always told me that putting in money will increase your return. Is this possible or is the agent just incorrect?

Many agents don't understand Investing .

If you are buying the property at a good price below market value and the comp sales show higher prices then that tells you that you can sell for a profit .
I have no idea what the numbers are on your deal but let's say
You buy for 200,000 . It needs $20,000 in rehab work to get it to the condition comps are selling for and comps are $300,000 you will make a profit more than 3%.

Some neighborhoods are more rental areas versus homeowner areas but if sales are steady and homes aren't sitting on the market forever that should give you a good indication you can fix and sell for a profit .

Thanks for your response basically the property is in charlotte NC. it's a hot market right now so although the prices are cheap as compared to other areas its selling for appraisal amount. It really doesn't NEED work but for instance it has no washer and dryer, garage/storage place old cabinets etc. I feel if i do some of these things before i sell years after holding it as a rental property o should be able to make extra on the rehab. I didn't agree with the agent and was curious what investors thought.

@Eric Calabrese

Your agent is correct.

Some markets have little to no appreciation. In that type of area, it doesn't make sense to put too much into a property because no one will be willing to pay more than the prevailing prices in an area.

Until people are more willing to pay higher rents, you keep the place in the most economical situation possible.

Also, you don't put money into a rental with expectations that you'll get it back at sale time. Renters wear everything out, in some cases damage everything. By the time you sell, those "nice to have" items won't be worth the money you put into it.

I agree the rent is very strong in that area and is growing. I'm trying to buy it as a long term cash flow property anyway. So i was just curious. Honestly wasnt going to do much for the renter besides a washer,dryer and have a shed built in the backyard to maximize rent.

john, honestly i never saw myself even comming close to paying market value for something. I always wanted to get things 15-20% cheaper but the property is in a 2% rent vacancy area and a 9%-10% COC return and built in 2002 so it's on the newer end. I thought if the numbers make sense the deal made sense.

@Eric Calabrese

Certainly, you would want to make minor tweaks to get maximum rent. But, you should check the ROI of making that investment. How much extra would you be able to get by having a washer and dryer?

Sometimes it's a matter of expectations. In areas where people expect them, then you have to in order to keep up with other rental properties. But, if no one expects the washer and dryer, it's just a "nice to have" item and they probably won't want to pay extra per month.

As an example, if you think you can charge an extra $50-$100 per month by having those extra items, then you can calculate how long it will take to get back your investment.

@Eric Calabrese I think what your agent is saying is that there's a price ceiling in the neighborhood. To take it to an extreme (for demonstration purposes) if I put an $18K Viking 10-burner range/stove in a $100K home I'm not going to get $18K+ value. In fact, I'd probably "lose" money because adding an $18K appliance doesn't mean I'll get $18K more at time of sale. You can extrapolate this out with cabinets, flooring, fireplace upgrades, a deck in the back, etc.

That kind of appreciation is different than rising-tide appreciation caused by the increase in demand, land values, etc. I'm sure the rising tide (based on comps) will still apply when it comes to appreciation. It's just that you doing certain improvements may not appreciate the property in the short-term.

Christopher, thank you i will dig around and see if other homesbcome equipt with a washer and dryer in the area. I do know most other homes on my block come with a garage so the nice sized shed i want to build is more of a necessity than anything.

Just for our reference, what kind of price point are we talking here (ARV) for what kind of property? So far I agree with other's interpretation of what your realtor may be trying to tell you, and he/she may very well be right.

If you are buying at appraised or market price then it makes more sense what the realtor is saying . Betting on future appreciation is viewed more as speculating.

If you are buying under market and improving the property it's often called "forced appreciation"

Even in a strong market you should still be looking for a deals that you can get at below market . Of course it will be more difficult to achieve in a strong /sellers market .

If you are paying market it's not really a "deal"

Originally posted by @Eric Calabrese :

john, honestly i never saw myself even comming close to paying market value for something. I always wanted to get things 15-20% cheaper but the property is in a 2% rent vacancy area and a 9%-10% COC return and built in 2002 so it's on the newer end. I thought if the numbers make sense the deal made sense.

 IMO still too much. Make a deal where you get a 20% discount AND there is strong demand. Those can be had by luck, searching, or making offers. I have purchased several from Craigslist and got some GREAT deals. Don't count on appreciation to make money. Markets cycle. If you buy 20% under market, a 20% drop and you are not under water.