End of Life Properties - Do you factor in appreciation?

Question

Hi all- I've been a lurker for a while and am analyzing a few deals and an interesting situation came up.

I am looking at low income properties in the 30-40K range and the numbers look great for the first several years, even factoring in the repairs and problems associated with old houses and low income tenants. My strategy is a buy and hold with roughly a 10 yr time horizon. The problem is that the houses are in the 100 yr old range which is the norm in this part of the city.

I do all of my analysis assuming 0% appreciation, I don't want my numbers being skewed by speculating on appreciation and I would have a hard time justifying much appreciation in these neighborhoods.

So now to the actual question... given that the properties are so old, and my time horizon is in the 10 year range, can I reasonably expect to sell the property what I have bought it for? It pushes the property past the 100yr mark.

Matt Ellis · Answer

Thanks Jay, that's a great point about the 2% rule. That alleviates quite a few of my concerns going forward!

Appreciate the insights!

Jay Hinrichs · Answer

@Matt Ellis as your aware its just a cash flow game... as there is no real value in those assets other than a vehicle to create cash flow.. age does not matter for resale.. it really boils down to how much you have to put into them while you own them and how many bad tenant you have over time.

new buyer 10 years from now is just going to back into a sale price based on the 2% rule or whatever metric.. especially if its a local investor who understands the challenges in that asset class...

Michele Fischer · Answer

Matt, think it is wise to plan on zero appreciation in low income areas. As far as houses over 100 years old, a lot of people appreciate the older houses; they are much better built and have more character and more to work with for a major remodel. Of course, I'm not sure how much that translates to investors of low income properties. I have lived in 100+ homes, but have only invested in 1950's and newer homes. A lot of that is based on what is available where. If the property doesn't need a lot of updating work at the time of sale, think the financials would be more important than the age of the property.

End of Life Properties - Do you factor in appreciation?

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