Buying Old Rental Properties for Cash Flow

Buying & Selling Real Estate
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Buying Old Rental Properties for Cash Flow

Peter Lee
Real Estate Investor · Member since 2011 · 56 posts · 9 votes

Hey guys, I was wondering what your take was on this situation.
I'm thinking about buying a few older rental single family homes vs buying a newer home.

Here are the specs.
Older House
Built: 1950 - 1970
Cost: $40k - $50k
Sqft: 900 - 1300sqft, 3 bed
Rental Income: $600 - $800 /month

On a scale of 1 - 10, 5 being middle class type of house, I would say it's like a 3, it's not in a great neighbor, but it's not what you see on TV when you think of the Ghetto, gangs, violence, etc. That would be a 1 on the scale.

Newer House
Built: 1995 - 2000
Cost: $90k - $110k
Sqft: 1000 - 1400sqft, 3 bed
Rental Income: $1000 - $1100/month
On a scale of 1 - 10, 5 being middle class type of house, I would say it's like a 4, maybe 5. It's in a nicer area. These are like starting homes for young families.

What are you're thoughts?
I could buy much more older houses (2x as much), and cash flow is much better.
Do you feel that a home built in 1950 is old? It's concerned old where I live.
Would I have a bunch of issues with it down the road with the older house or 1950 isn't really that old for a house?

Sample pics of older house:
Built 1963

Built: 1969

Sample pics of newer house:
Built: 1994

Built: 2002

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James H.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y

Regarding the subject of build quality; how many people are wary of buying houses built during 2003 to 2007? They were really tossing these things up. I was involved in residential construction in various capacities at different times throughout this period and was not impressed with what I saw going on behind the sheet rock. From my experience, older houses tend to be built of sturdier construction and better materials. The con with older houses is the mechanical systems and energy efficiency.

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  • Will Browm
    Investor · Buford, GA · Member since 2012 · 120 posts · 31 votes
    14y

    In the past three months I have bought my first two homes (single story all brick ranches built in 1955 and 1954). The rehabs were pretty easy and both are rented. There is no question that the bang for the buck for cash flow is great. That said, you need to get your reserves built up quick. Both of my homes had gone months without anyone living in them. Throwing families into the hottest week on record has caused me to spend over $750 on A/C unit repairs that had been checked at or before purchase.

    I am going with the older cashflow homes but I see why some steer away with the maintenance.

    1Reply
  • Tyler J.
    Member since 2012 · 32 posts · 1 vote
    14y
    Originally posted by Will Browm:
    In the past three months I have bought my first two homes (single story all brick ranches built in 1955 and 1954).

    I know this is off topic, but buying your first 2 homes did you go through a bank? What kind of mortgage did you get on each of them? Just curious as I am about to buy my first.

    0Reply
  • Steve D.
    Real Estate Investor · Virginia/North Carolina · Member since 2011 · 25 posts · 6 votes
    14y

    Peter,
    your analysis doesn't mention if the price includes any rehab. From looking at the pictures, it appears you certainly have costs to get the older homes marketable and if you intend to get a rental rate on the higher scale, while also minimizing your maintenance risks, you will no doubt have interior rehab costs.
    personally, the numbers as you present don't make me too excited, especially with lower end neighborhoods where your vacancy rates are higher as well as maintenance costs.
    If this is your first deal, take it slow and be careful.

    0Reply
  • Phillip Dwyer
    Real Estate Agent · Henderson, NV · Member since 2011 · 1k+ posts · 550 votes
    14y

    Hi Peter,
    You have several things to consider. The older homes typically are not located in HOA's, so you don't have that extra monthly fee or the burden of worrying about your tenants complying with the rules and regs. Maintenace cost will be higher. Roofing typically consists of ashphalt shingles which don't last too long out here. I'd really check out the neighborhoods in more detail, so you're aware of the tenant pool. Also, make sure to check out what your competition is doing with similar homes. In your price range, you'll be doing rehab work for sure, so make sure you know where to stick the dollars.

    In regards to the newer homes, here's a few thoughts. Most will be located in HOA's. This usually makes for more visually pleasing neighborhoods. However, you have to worry about HOA liens when you purchase. You have an additional monthly expense. Tenants may not follow the rules, so you have to worry about dealing with those violations when the occur. Keep in mind, newer doesn't necessarily mean better neighborhood. Drive the neighborhoods at different times of the day, weekends, ect. With your price range for these newer homes, you'll be doing some work as well.

    Be sure to take a look at rental inventory in both areas. Some may have an over supply. Know your competition. Know your client base.

    1Reply
  • Peter Lee
    OP
    Real Estate Investor · Member since 2011 · 56 posts · 9 votes
    14y

    Thanks for the reply guys,

    Steve: Most of the homes that I buy, I usually budget about 8-12k in repairs. Paint, Floor and refit plumbing is typical. This is not my first deal as I have purchased over a dozen homes in the past. This would be my first older home deal tho.

    Phillip: Yes, good tip on driving in the area at day / night. I did pull up the COMPs for one prospective home and I think I can get $900-$1000 a month, asking price $52k. From the picture I see, it looks like it's almost ready to rent. I will be looking at the property tomorrow.

    Also, how long does the typical asphalt shingles roof last?

    Someone mentioned the lead paint issue with older homes, anyone know anything about that?

    Thanks
    -Peter.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Asphalt shingle roof materials are usually warrantied from 20 to 30 years, but are susceptible to hail damage land low roof pitches.

    Older houses before 1978 or something like that may have lead paint. A house built in the 50's probably has lead paint. Just paint over it with non lead paint (probably already has been painted over throughout the years). Really the biggest concern with lead paint, IMO, is that you can create dust when you are stripping the paint outside and that should not be inhaled. Better to soak with bleach and pressure spray to remove loose paint before repainting.

    0Reply
  • Account Closed
    Houston, TX · Member since 2011 · 37 posts · 10 votes
    14y

    So far, I have stuck to purchasing 2000 or newer for my buy and hold rentals. Yes, the cash flow numbers are probably not as great as the older ones and it is harder to get these at a discount but at least I have greater peace of mind when it comes to future repairs and maintenance.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Peter Lee:
    ...

    Someone mentioned the lead paint issue with older homes, anyone know anything about that?

    ...

    There is far too much bad information posted on BP regarding the EPA lead paint rules and the RRP certification; here are some links that aren't too far off course:

    http://www.biggerpockets.com/forums/24/topics/50945-i-m-now-epa-lead-paint-rrp-certified

    http://www.biggerpockets.com/forums/24/topics/65125-are-your-contractors-lead-safe-certified-

    http://www.biggerpockets.com/forums/52/topics/72467-rental-property-and-lead-paint

    http://www.biggerpockets.com/forums/52/topics/65126-do-landlords-need-to-be-lead-safe-certified-

    http://www.biggerpockets.com/forums/48/topics/44111-epa-makes-it-illegal-to-be-a-handyman-seriously

    http://www.biggerpockets.com/forums/67/topics/64584-fyi-for-investors-contractors-on-lead-safe

    http://www.biggerpockets.com/forums/67/topics/48278-april-22-2-1-epa-lead-based-paint-rules-change

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Regarding the subject of build quality; how many people are wary of buying houses built during 2003 to 2007? They were really tossing these things up. I was involved in residential construction in various capacities at different times throughout this period and was not impressed with what I saw going on behind the sheet rock. From my experience, older houses tend to be built of sturdier construction and better materials. The con with older houses is the mechanical systems and energy efficiency.

    2Reply
  • Peter Lee
    OP
    Real Estate Investor · Member since 2011 · 56 posts · 9 votes
    14y

    Wow, that's a lot of threads on lead paint. I'll have to read it when I get a chance.

    In all reality, i don't think it's going to be a big deal regarding the lead paint issue as there are tens of thousand to hundreds of thousand houses that were build in my town pre 1978.

    I just need to cover myself in case of issues down the road. Does anyone know if I get some sort of certification saying that my house is clear from lead paint? That way, I would transfer my liability to the company that issue me the certification.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y
    Originally posted by Peter Lee:
    Wow, that's a lot of threads on lead paint. I'll have to read it when I get a chance.

    In all reality, i don't think it's going to be a big deal regarding the lead paint issue as there are tens of thousand to hundreds of thousand houses that were build in my town pre 1978.

    I just need to cover myself in case of issues down the road. Does anyone know if I get some sort of certification saying that my house is clear from lead paint? That way, I would transfer my liability to the company that issue me the certification.

    I would just not worry about it.

    If your tests come back positive, then you will be culpable and you will from thereon have to disclose instead of pleading the 5th which is what happens 99.99% of the time when you read a sellers disclosure on an older house.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Brian Hoyt:
    Originally posted by Peter Lee:
    Wow, that's a lot of threads on lead paint. I'll have to read it when I get a chance.

    In all reality, i don't think it's going to be a big deal regarding the lead paint issue as there are tens of thousand to hundreds of thousand houses that were build in my town pre 1978.

    I just need to cover myself in case of issues down the road. Does anyone know if I get some sort of certification saying that my house is clear from lead paint? That way, I would transfer my liability to the company that issue me the certification.

    I would just not worry about it.

    If your tests come back positive, then you will be culpable and you will from thereon have to disclose instead of pleading the 5th which is what happens 99.99% of the time when you read a sellers disclosure on an older house.

    It's not the presence of lead based paint that is so much a problem with the EPA - it's doing work for a profit on a property that potentially has lead based paint and disturbing too much of that lead paint ...

    Whether you are a landlord or a flipper, you are seeking a profit and the EPA RRP rules apply for work that is being done.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Steve Babiak,

    I understand what you are saying,but you have nor provided any implicit action on what to do about it. Only a warning of the lead paint boogie man. If you decided to test and remediate, you are going to kill 99 percent of the deals out there with older houses.

    So you work on the house and disturb some paint. Then what? Call out HAZMAT? Not really. I replaced all the siding on my house. Pretty good chance there was lead paint on it. I took the material to the dummp and called it a day. So what? Whether it is a rental or not, so what?

    My rental has asbestos siding. If I do anything about the siding, I will just put new siding over the top of the old and call it good. So what? I mean, really, what are the practical solutions?

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Brian Hoyt:
    ... really, what are the practical solutions?

    The EPA wants the RRP rules to be followed; whether you believe that is practical or not is your opinion - the EPA isn't listening to opinions at this time.

    0Reply
  • George P.
    Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
    14y

    this thread turned into a lead paint discussion, so i will add to it...

    we give a handout that reads something like "property is from before 1978, so it may or may not contain lead". end of story.

    do not if it will be enough in court, and hope with all i've got i never have to find out.

    bottom line (i know it would never stand in court), why would the parents let a kid eat paint chips. but that's TOTALLY another topic. lol

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by George P.:
    ...

    we give a handout that reads something like "property is from before 1978, so it may or may not contain lead". end of story.

    do not if it will be enough in court, and hope with all i've got i never have to find out.

    ...

    That is the HUD federal disclosure required with either a sale or rental of pre-1978 housing. The disclosure puts you in good standing. But, since sometime in the summer of 2010, the EPA has new lead paint rules that affect renovations. So, if you do not renovate, and leave things as is, you continue as you were with the HUD disclosure. Once you renovate, then you have to follow the RRP protocol. The thing with this is that the EPA doesn't have field inspectors going around while you are doing work; they are more likely (sometime after the work is completed) to audit the paperwork records that are supposed to be kept. Sort of like the IRS doing tax return audits in a way.

    0Reply
  • George P.
    Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes
    14y

    steve, so i get a house with the wall already removed. how would they know if i removed it or it was this way to begin with?

    how would I even know in 10-15 yrs? i'd forget by then...

    0Reply
  • Peter Lee
    OP
    Real Estate Investor · Member since 2011 · 56 posts · 9 votes
    14y

    So odd are that I won't get audited by the EPA, so I plan on simply giving my tenant a form that says the house was built pre-1978. I would probably just use the exact same form I get from the lender at escrow.

    When I one day I have to resell it, I would of course have to get it show ready and probably end up painting the house. If I do get audited, not sure what to do, but point the finger the other way to the contractor that left town? lol. I'm sure that will be ok?

    0Reply
  • Account Closed
    Lender · Salt Lake City, UT · Member since 2012 · 714 posts · 169 votes
    14y

    I would agree with that last thought…

    0Reply
  • Rob K.
    Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
    14y

    Brian Hoyt

    You can not pressure wash if there is lead paint present. You need to follow the EPA rules or risk a $37,500 fine for the first offense. Anyone who has a rental property should get certified and learn the rules. Pressure washing is a no no. You are supposed to put on a space suit, wear a respirator, and place plastic down on the ground before scraping.

    Hopefully we will get a President and Congress that gets rid of the EPA one day.

    0Reply
  • James H.
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y
    Originally posted by Rob K:
    Brian Hoyt

    You can not pressure wash if there is lead paint present. You need to follow the EPA rules or risk a $37,500 fine for the first offense. Anyone who has a rental property should get certified and learn the rules. Pressure washing is a no no. You are supposed to put on a space suit, wear a respirator, and place plastic down on the ground before scraping.

    Hopefully we will get a President and Congress that gets rid of the EPA one day.

    I hear what you are saying. The real deal is this, though: Regardless of the EPA requirements, Pre-soaking with bleach and spraying it down is the most practical, safe way to do it. If you scrape it or sand it dry, you will inhale it. If you are worried about the lead leaching into the 3 to 10 ft of soil around the perimiter of your house (for those who garden and eat vegetables below the house eaves or those drilling water very shallow water wells next to the house) then you can collect runoff with plastic sheeting.

    I did volunteer work in NO after Katrina and can tell you those Tyvek Suits are a joke as are most respirators. I gaurantee you they will not stay on when it is 100 degrees outside as it very often is in Texas and almost anywhere in the summer. Everybody out there were either stripping the suits off all the way or part way after about 30 minutes in that climate.

    As far as worker related exposure, repeated exposure on a regular basis is where the danger is - not a handful of rehabs thoughout the course of your life. If you are a contractor dealing with lead on a daily basis - yes protect yourself. But if you are a landlord replacing some windows and some rotten siding boards here and there, space suites and respirators and certifications, blah, blah, blah, are overkill.

    Yeah, this is not the letter of the law and totally my opinion. But just like I am not going to keep a lawyer on retainer and put every one of my properties into an LLC, I'm also not going to get EPA certified and work in a space suit and respirator for occasional maintenance work.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y

    I don't think the EPA cares about the tyvek suit or respirators (those are things OSHA worries about). The 6 mil plastic sheeting on the other hand, that is the domain of the EPA. One of the challenges of different regulatory bodies is to understand which is covering what aspect of the job site.

    In moving forward, Rob K offered good advice for those of you seeking to do this type of purchase and renovation.

    As to whether you or somebody else did work, that is the purpose of record-keeping. Document your initial condition, and document work as it is ongoing. Getting RRP trained would enlighten on this.

    0Reply
  • Larry K.
    Investor and Architect · Ramsey, NJ · Member since 2010 · 305 posts · 84 votes
    14y

    Using 50% rule:
    Deal 1 (Older House) is a 9.6 cap.
    Deal 2 (Newer House) is a 6 cap.

    Deal 1 (Old)
    800 x 12 x.50=4,800 NOI
    ___________________________

    50,000 All In = 9.6 cap

    Deal 2 (New)
    1,100 x 12 x .50=6,600 NOI
    _________________________

    110,000 All In = 6 cap

    Excluding Rehab and Debt and figuring the neighborhoods are about the same.....
    Deal 1 is a much better deal from a cap rate standpoint.

    With Deal 1 you'll have your money back in about 10.4 years (50,000/4,800=10.4).

    With Deal 2 it will take about 16.6 years (110,000/6,600=16.6)

    0Reply
  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y

    Just for the record, i wouldn't do either deal. If i had to pick, i'd go with the older property. I personally find the stinkiest smelliest and try to rehab them as much as makes sense up front. Bigger discounts up front and less unexpected maintenance post rehab.

    I'm surprised no one has jumped in here stating the 2% PP goal from a monthly rent, so i will. If you're buying at 50K and putting 20K in, you'll want 1400 in rent or pretty dang close. Not easy to find, but, thats why it isn't "easy" to make money in real estate either. Do your DD and if you can't find those returns, go to a market where you can.

    0Reply
  • Tom A.
    Investor · West Bloomfield, MI · Member since 2009 · 358 posts · 306 votes
    14y

    I'm not automatically a big believer in the theory of "old house - high maintenance, newer house - low maintenance".

    Things in a house have a life expectancy. You could have a 2002 house and a 1952 house and the 2002 may need more maintenance in the next ten years than the 1952 house. The older house is already several replacement cycles into things. It could be at the beginning of the replacement cycle for some of the more costly items (roof, HVAC, windows) if the prior owner recently replaced them.

    The 10-year-old house on the other hand may be getting to the point where the HWH needs to be replaced, the exterior needs paint, the fir (cheaper than cedar but not decay-resistant) trim boards are starting to show rot as the caulk cracks, the builder-grade windows are fogged and the skylights are leaking. In the next 10 years you'll be getting close to the end of the expected life of the roof, gas furnace and A/C.

    There's nothing to be scared of in a 50 year-old house. If the original plumbing and electrical systems are there you'll probably want to update to copper or PEX in place of the galvanized and circuit breakers in place of fuses, but if you get your standard 50's brick ranch with plaster walls you can have a solid, low maintenance house.

    I think you really have to look at the individual houses more than their vintage.

    1Reply
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