Why to avoid < 50 k properties
I think a house can appreciate despite depreciation due to a lack of supply and increased demand. For example, if no new cars were being produced, a car that I bought three years ago could be worth more a year later, even though it is a year older. This could happen since there is no new supply but demand has increased to a point offsetting and overtaking the "depreciation" of the parts.
Originally posted by @Christian Hutchinson:
The thing was there was a ton of cheap properties. For $1 or $10K. Thats a sexy headline, it shows doom and gloom. Where the REAL steals were in the near Downtown neighborhoods or the "exclusive" areas with 4000-8000 sq ft homes, limestone, turn of the century woodwork, etc that just couldn't be done at any reasonable price today.
Those homes were in bad need of updates (galvanized pipes, knob and tube, radiators, 100 year old windows, etc). Structurally were excellent however. These homes sold for $30K-$50K intially, the prices were accelerating. We literally bought one of the last 3 or 4 homes in Midtown Detroit that was like this, and livable. We were about 18 months late to the party or else we score something in the 70s. Then luck kicked in and 4 billionaires decided to start developing Downtown Detroit and adjacent neighborhoods.
See now the word is out and people like yourself are looking in the neighborhoods locals bet on or had a soft spot for 4-6 years ago. The prices are just not doable for investors now, so we head to "adjacent" neighborhoods. I have a deal I'm working now, that a local would jump on, because they see the trends, but even someone outside the City would hesitate, and out of Staters no way, but as a rental it brings in huge cash, but the appreciation is very speculative(rehab will get dollar for dollar at best in year 1 and 2).
The Canada property was at a discount listed $860K purchased at $750K, plus its across from my wife's parents house, so we can decide to move to Canada at very low cost in the next 5 years.
Good post. Sounds like a very beautiful home that you purchased.
It's funny you mention that because that's the first thing I think about when I see a neighborhood that's appreciated a lot. That there is going to be a good chance the adjacent neighborhoods will appreciate. I've seen that happen in L.A, but now there aren't any neighborhoods that make sense. Those 'up and coming areas' are like $500,000 for a fixer house.
When I've looked before just as an out of stater it seemed the Mexicantown area could be a good neighborhood to invest in, I noticed the prices there were much less than Downtown/Midtown , even though it's adjacent. Not sure if that's one of the neighborhoods you look at or invest in.
If there is a supply and demand change, e.g., in newton, the land appreciates, not the house structure.
The reason is that if there are ample cheap land available, developers can build new houses.
For example, you own a house (A) sitting on 5000 sf land (B) in Newton, as well as an open lot (C) right next to your house, same size.
Lot B and C should be worth about the same.
If House A (sitting on Lot B) is worth $800/sf, and house A is 2000 sf, the total value is 1.6 M.
However, this 1.6 M is mostly land value, not house value.
Assume new construction cost of $100/sf (as some claim in this forum), the new 2000 sf house (Let call it D) will cost about $200K to build. If you build a 2000 sf house on Lot C, you can sell that new house for >1.6M, because the old house A sitting on Lot B is worth 1.6 M.
Let's go back 7 years to 2010, the same house may only be worth $400/sf, in other words, about 800 k. The land value at that is a lot lower, whereas the house value is about the same as today, assuming new construction cost is the same.
In 2010, the house is still worth about $200K ish (of course lower, due to its an older house), the land is worth about 800K minus the structure value (let's assume 150K), which equals about 650K. Therefore, you can probably sell the lot C for <650K (assume 200k profit for developer, 450K).
In 2017, the same house is worth $800/sf, or 1.6 M. The structure itself did not increase in value that much (since the new construction cost did not go up that much). How much is lot C worth now? A developer can sell a new 2000 sf house on lot c for 1.6 M, with a construction cost of 200K (again, assuming no significant change in construction cost). The lot C will be worth about 1.6 M -200 K (construction cost) - profit margin (200K) = 1.2 M.
So in this scenario, the land appreciated from 450 K to 1.2 M, whereas the house probably depreciated over the 7 year period, due to wear and tear.
Of course, you can argue that the construction cost may go up. Sure, that is inflation factor. It is correct that inflation will cause an increase in structural value over time. If construction cost increase significantly, then the structure value will increase.
It is a very complex mathematical system that we investors need to be keenly aware of. There is no simple answer to this question.
To the other extreme, in areas where land is worthless, the value actually comes from the cash flow and structure itself. We can write another few pages on this, but if land does not appreciate, only cash flow matters.
Some BP friends invested in Detroit metro and got great appreciation (3X), but I bet they picked the right location for it. If they invested in war zones, they won't see any appreciation at all. What appreciated in their case is also land, nor structure. Because the same structure in the same city (detroit), if it is in a wrong neighborhood, the value did not increase. This further supports that structure itself can not really appreciate that much (except the inflation factor or antique factor).
Originally posted by @Joseph M.:
Originally posted by @Christian Hutchinson:The thing was there was a ton of cheap properties. For $1 or $10K. Thats a sexy headline, it shows doom and gloom. Where the REAL steals were in the near Downtown neighborhoods or the "exclusive" areas with 4000-8000 sq ft homes, limestone, turn of the century woodwork, etc that just couldn't be done at any reasonable price today.
Those homes were in bad need of updates (galvanized pipes, knob and tube, radiators, 100 year old windows, etc). Structurally were excellent however. These homes sold for $30K-$50K intially, the prices were accelerating. We literally bought one of the last 3 or 4 homes in Midtown Detroit that was like this, and livable. We were about 18 months late to the party or else we score something in the 70s. Then luck kicked in and 4 billionaires decided to start developing Downtown Detroit and adjacent neighborhoods.
See now the word is out and people like yourself are looking in the neighborhoods locals bet on or had a soft spot for 4-6 years ago. The prices are just not doable for investors now, so we head to "adjacent" neighborhoods. I have a deal I'm working now, that a local would jump on, because they see the trends, but even someone outside the City would hesitate, and out of Staters no way, but as a rental it brings in huge cash, but the appreciation is very speculative(rehab will get dollar for dollar at best in year 1 and 2).
The Canada property was at a discount listed $860K purchased at $750K, plus its across from my wife's parents house, so we can decide to move to Canada at very low cost in the next 5 years.
Good post. Sounds like a very beautiful home that you purchased.
It's funny you mention that because that's the first thing I think about when I see a neighborhood that's appreciated a lot. That there is going to be a good chance the adjacent neighborhoods will appreciate. I've seen that happen in L.A, but now there aren't any neighborhoods that make sense. Those 'up and coming areas' are like $500,000 for a fixer house.
When I've looked before just as an out of stater it seemed the Mexicantown area could be a good neighborhood to invest in, I noticed the prices there were much less than Downtown/Midtown , even though it's adjacent. Not sure if that's one of the neighborhoods you look at or invest in.
Mexicantown, could work. The issue lots of realtors are hoping to hook someone like yourself. Rents wont get too much above $800/mo.
I just looked at a property today, and I could tell the seller(also the agent was spooked) we had notebooks for notes, my contractor had a team of people photographing. He wanted to cancel cause it was raining. I wanted to see it even more, tells me how the windows, gutters, roof, and foundation is doing.
Personally, I'm working the North End/Woodward Corridor and the Villages. You can score stuff 30-75K. the closer to 75K better shape of the property. A 30K house needs 40K of work.
Also only do multi-family in Detroit, its the only way for numbers to work.
You guys know Detroit well.
Yes certainly in Newton most of the value is land value. But a 50K house could in theory appreciate in value even though it is all the value of the structure and the land has no value. This could happen like you said due to inflation, a big increase in incomes in the area etc. Obviously wear and tear is a constant headwind for appreciation of the structure that land appreciation does not face. Also, land can appreciate indefinitely, whereas the structure itself is limited in appreciation by the cost of construction.
YOU ARE CORRECT. when there is low land value, the appreciation of the structure is very limited. Oftentime, depreciates much faster than appreciation rate.
You seem to be missing several things in your review:
1. Turning neighborhoods.
2. Cause for pricing.
3. Non-publicized opportunities.
4. ROR.
For instance one property I am looking at is going for $2k at a auction. What most people don't know is that it has a occupant that has been paying rent for 2 years to some one who doesn't own it. $650 a month. I will put $10k in. You do the math. All in at $12k, taxes and insurance will run me about $150 a month. I will clear $500 every month. In 5 years I will sell it for $50k+ and have collected a ton in rent. Net will be close to $70k. Why do I know how much I will be able to sell it for conservatively? The neighborhood is changing and the market has not put the pieces together yet.
The reason I am going to buy is people are 1 year behind on what is going on they wait for the ground breakings to believe change is coming. I on the other hand look for the signed contracts and buy in early.
@Aleks Gifford , sounds like it could be a great deal. You will be all in for $12,000 , what is current market value or ARV?
I have heard that neighborhoods have been changing in Indianapolis. It does sound like a great opportunity to invest there with your local knowledge.
You mention in 5 years you will be able to sell for $50,000+ but what is current market value or ARV?
Originally posted by @Aleks Gifford:
ARV is $35k...
Do you flip in the area too or mostly buy and hold?
I laugh out loud every time I see a post like this. Thanks for the laughs lol.... Free tip: Not all markets are the same, you’d be stunned at what you can buy for $50k in some areas of the country.