Is the age of a multifamily a factor?

10 Replies

Hey pocketeers,

is the age of an apartment complex a factor(deterrent) in financing/ resale etc as long as it is in decent shape?

Would you have reservations purchasing a 50 plus year old multi?

Will,

The simple answer is yes, it is a factor. Older properties tend to have higher maintenance / capex cost and just generally require more attention. Also, even if you take an older property and do a full renovation (new plumbing, electrical, roof, etc, etc.) it is unlikely that you will be able to provide all the amenities that new(er) construction probably do (e.g. exercise room, higher ceilings)

The counter example is a old building that was build with large units and lots of architectural detail in a 'trending' part of the city. If done right, it can really shine.

Having said all that, I would not hesitate to buy an older building if the numbers work. Rather I would be looking at the tenant base for the area, what the immediate local market rates and vacancy rates are and reverse calculate what will it take to bring the property up to the neighborhood standards (or just slightly better :). That combined with your return expectations will tell you what is the most you can afford to offer.

Oren

i just bought a 100 year old multi.  We did end up finding things wrong with it that were unexpected but luckily I was very conservative with my rehab budget numbers. I'd suggest you do the same on the old properties.  (as in budget way over what you think it will cost to fix up and make sure the numbers still work)

also have a qualified GC take a look at it first to make sure there's nothing crazy structurally wrong with it.

Just adding to what's already been said. Yes, it is a factor. So just factor that into your underwriting. Older properties will likely have a chiller system instead of individual HVAC. You need to know how old that chiller is because it can be a significant cost. Also know the limitations of that type of system, such as it takes some time to switch from hot to cold so you usually only do it a few times a year. So if you cut over to heat in the fall and you get a week of warm weather come through, your tenants will end up just being hot. You will also have to deal with cast iron plumbing on the older properties amongst other 'features' of older properties you will just need to account for.

I am sure everyone heard the saying, “Age is just a number”. Well in real estate it's also true. Over time, these properties actually get more expensive! If the property is bought in the right neighborhood, and was rehabbed up to city standard and is up to code with all inspections (electrical, mechanical, plumbing, etc.) then what difference does the age of the property matter?

As most others are responding yes it matters but what you also have to consider is the future implications an aging property carries. I went from a construction background to multifamily investor and syndicator so you would think I would be the one trying to get 70+-year-old properties because I know how to fix them. But it is my belief there is a bigger trend that will hurt maintenance heavy properties more than it will newer less maintenance demanding properties and that is the rising cost of labor specifically in the trades. Check out an article I wrote for BP on this below:

https://www.biggerpockets.com/renewsblog/shrinking-skilled-labor-force/

@jered sturm, very interesting prospective, and i certainly see and feel what you are  saying, and makes me wonder how folks will respond, for instance, any trade that can be reduced in new construction, like using sips wall systems instead of custom framing, or a trend toward modular, etc. Any new products or systems that reduce people on the jobsite will have an advantage(robots)!

Also means a person capable of rehabbing a home should be able to make a good living flipping

Anything less than 1970 makes me cringe a bit. Also a lot of building exteriors that are not salvageable. Think pop ceilings. The last one we did was 1984 and that perfect with the possibility of another good rehab in the future.

Does the property have functional obsolescence issues? If not then it's just a process of doing due diligence and determining a proper maintenance budget, RR/capex reserves and how those numbers fit into your underwriting. Hopefully there are a few issues to address and an opportunity to increase rents. 

@Spencer Gray - Yes everything can be repaired but does it make sense. And if repairs are not done, is the property safe and habitable.

So it's not so much functional obsolescence (every one needs a place to live) but lets call it financial obsolescence. A property that has not been maintained through out its history, at a certain point, it is not worth bringing back as market rents (hence NOI) makes the return unattractive (or even negative).

You hear rehabbers / inspectors talk about good bones; that the foundation / structure / shell are in reasonable condition because these can be very expensive things to repair correctly.

Recently saw a property where the interior has to be totally gutted down not just to the studs but to the cinder block and who knows what the condition of the structure is. In addition, the exterior brick has any number of cracks. The tuck pointing work that needs to be done is massive (basically taking apart exterior walls brick by brick and then putting them back). You would need to deconstruct then rebuild the building with out the efficiency of ground up construction.

The market rents at that location simply would not support the investment needed if I was given the property. Government / charity can step in but then it's a different kind of investment.

@Oren K.

I think we're on the same page. 

Besides issues relating to functional obsolescence anything can be fixed (outside of tearing down and building from scratch), but it's all about how it effects the numbers and underwriting, of which physical condition is just a part of. It doesn't make sense to completely gut/rehab if you can't achieve much or any of an ROI of those funds. Often it doesn't make sense to do anything. There's also inherent risk in any kind of rehab/construction project, the more there is to do the more chance there is of something going wrong. The more experienced you are the more you can understand that risk to a point where it is minimized as the process has become a part of your systems/best practices. Just like you said - it all comes down to what rents can be achieved after the fact. Then it's down to comps, demographics and how the asset will be operated.

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