I can buy cheaper than it is to build, will this make me wealthy?
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
Hi BP community. I am having a great time in Wichita, KS in my first year and a half to two years of investing; we have taken an aggressive approach by investing in a low income high crime area near downtown Wichita. My question is- if I am buying houses for cheaper than it costs to build a similar home, can I reasonably believe/state that one day the property will appreciate, substantially. Even in a D or F area, everything will appreciate by the time my kids get it. Right? Buy enough of these properties, my kiddos will be swimming in gold coins like Scrooge McDuck in the cartoon with all the other landlords. To clarify, I am stating that every single peice of real estate will appreciate in 20 years plus if bought for a price under the cost to build a similar home and maintained well. The folks saying do not bet on appreciation are wrong or are only talking about a time less than 20 plus years for holding a rental property. Am I missing something?
@Jonathan R. yes you are missing something. That is demand side of the equation. If there is no demand to live in a particular area, prices simply are not going to go up. It doesn't matter what it cost to build if no one wants to buy what you built.
Now with 20 years worth of inflation will your property be worth more? All things being equal yes. But they won't be equal. Neighborhoods change and the most likely scenario is those areas will continue to decline. The economics of simply maintaining the properties doesn't make sense
Of course the neighborhood could turn around and gentrify and you will look like a genius. You might buy a lottery ticket and win $10,000,000 too.
Never count on appreciation. Look at it like icing on the cake. Will they appreciate? Most likely. Could you have a Detroit v2.0 and they all become worthless? Possibly.
@Jonathan R. yes you are missing something. That is demand side of the equation. If there is no demand to live in a particular area, prices simply are not going to go up. It doesn't matter what it cost to build if no one wants to buy what you built.
Now with 20 years worth of inflation will your property be worth more? All things being equal yes. But they won't be equal. Neighborhoods change and the most likely scenario is those areas will continue to decline. The economics of simply maintaining the properties doesn't make sense
Of course the neighborhood could turn around and gentrify and you will look like a genius. You might buy a lottery ticket and win $10,000,000 too.
@Ned Carey What do you think of the argument that urban populations are poised for growth and low income real estate has no where to go but up? During a downturn, low cost homes are always appealing... that type of mentality still lacking?
That's all good and well but who is to say it would affect your market in a positive way? It could affect us here in PA great and you negatively. Or vise versa.
Look, in all likelihood within a 20 year span yes it will appreciate, by how much though who knows at this point.
@Ned Carey What do you think of the argument that urban populations are poised for growth and low income real estate has no where to go but up? During a downturn, low cost homes are always appealing... that type of mentality still lacking?
Because you can still buy (plenty of) satisfactory condition family homes for less than $30k in 2018 (ie. before the next credit crunch), can you see why "no where to go but up" is not a given?...
I agree with this to an extent. I think people do want to move out of war zones. But, what I am noticing in my area, the urban population does not want to move to the suburbs, even those that have the means. They would rather stay near their church, family, friends etc and see these D neighborhoods transition. They want to see the area they grew up get better, these neighborhoods are important in the context of their lives. The burbs can be discriminatory, many people want to remain in an area where the people are familiar.
C class and lower property values for investors would be governed by the rental rates. They do not appreciate on their own. Ideally C class and below rents should go up and property values remain stagnant.
For get about your kids, just take care of business today since the future has no guarantees..
There's a few neighborhoods here in Cincinnati where we buy 3/1 ranch on slabs for $15k-$30k and they were that same price 25 or 30 years ago. They're mostly rentals in the area, so there's no reasonable appreciation that you can price into your analysis. What's amazing is that they rent for $750-$800/month so the cash flow is amazing. It's just risky as heck because of the lack of appreciation.
@Jonathan R. I think it really depends on the neighborhood you are buying in. If you get lucky and there is some urban renewal that eventually takes place then you'll have decent appreciation or at the very least you could exit by rehabbing the houses, placing additions, whatever it takes to get the house to full retail level for whatever is going on around you and then exit.
But if you look in Wichita at a couple of neighborhoods that will never appreciate and have never appreciated - Plainvew and Hilltop - they'll only appreciate if they take a bulldozer there like they should have/were supposed to after WWII/Korean wars ended.
@Ned Carey What do you think of the argument that urban populations are poised for growth and low income real estate has no where to go but up? During a downturn, low cost homes are always appealing... that type of mentality still lacking?
That is a reasonable conclusion for the markets that do actually have growth. Not all cities are as well run as others. There will be winners with growth and losers that don't grow or shrink. Even within a growth market are your properties going to be in the path of progress? Will growth come in downtown areas or more suburban areas?
In Many ares of the country there is room to expand. Washington DC and San Francisco are both desirable areas to live. They have limited space so the land becomes more valuable. In some Midwest areas there is plenty of land to build new. That means more supply for the demand.
PS: I am not saying it can't work. I am saying you are taking a risk. You can reduce that risk with serious research on your market; studying market cycles, the attitude of the city regarding growth, master plans, jobs expected or know to be coming to the area.
My crystal ball is cloudy, but to minimize the risks of a possible (maybe likely) negative price appreciation, look at a few things:
1. In downtown Detroit, Dan Gilbert (Majority shareholder of Quicken Loans and the Cleveland Cavaliers) bought a large number of buildings, renovated them, and induced the owners of small companies in which he invested to locate in those buildings. The result? Downtown Detroit is attracting other investors and it is "moving on up."
2. In your area look for the potential economic drivers that are operational today that may attract outside investment. The area as you described in is at stasis, meaning it's going to stay the same unless some outside economic force moves it. What is going on in the immediate vicinity of your target location? Are there new businesses? Investment in infrastructure? New transportation modes? If so, hang around. If not move on.
In Denver, the biggest employers are the airport, hospitals, universities, and financial institutions. They all are having catalytic economic effects. That is what you should be looking for.
Note that "appreciation" can be tricky too. A home that has the same dollar-cost now as it did 40 years ago has actually lost nearly 74% of its value (average 3.51% annual inflation compounding over 40 years....) It seems prudent to assume inflation will continue. Unless there is a really good reason to believe the value of D-F properties of inner cities will outpace inflation, in some cases for the first time in their existence, it seems like this is not the no-brainer one might hope for.
@Jonathan R. I think it really depends on the neighborhood you are buying in. If you get lucky and there is some urban renewal that eventually takes place then you'll have decent appreciation or at the very least you could exit by rehabbing the houses, placing additions, whatever it takes to get the house to full retail level for whatever is going on around you and then exit.
But if you look in Wichita at a couple of neighborhoods that will never appreciate and have never appreciated - Plainvew and Hilltop - they'll only appreciate if they take a bulldozer there like they should have/were supposed to after WWII/Korean wars ended.
Thank you for the local perspective on this Shane. And I agree. Hilltop has areas they want you to lease land with a house on top, like a trailer park would have you do, and with all the duplexes and triplexes in Plainview, everyone is on top of each other out there. I’m honed in on NE Wichita within walking distance of WSU and the industrial district of downtown. Still unbelievably cheap it appears to me.
This string has given me a lot to think about. I really appreciate all your responses. Perhaps you have even cautioned me a bit until I do more research. I do love my strategy; I can’t help feeling like a kid in a candy store when purchasing homes for well under what it costs to build them. @Rodolfo Canon brought up fantastic points I need to continue studying in his second section. I want to say Wichita’s population growth is mostly stagnant, I don’t know if anyone can speak of Wichita’s urban population growth rate @Jared Viernes. This string has been invaluable for my own learning, thanks again for input so far. It’s important that we as investors keep our minds fit, especially on our strategies as it relates to our investing.
@Jonathan R. Kansas is experiencing a population and economic loss as a whole. Sedgwick county is one of the counties experiencing growth in the ecnonomy and population. That being said, the city of Wichita is experiencing population growth but it is well under the national standard. The same is true for the economy, we are growing but compared to similar cities we are falling behind (if you don’t read the Chung Report, I’d start subscribing to it). A lot of Wichita suburbs (primarily Maize and Andover) are experiencing above average growth in population and economic growth.
Now, for your original questions. I think the likelihood of appreciation has a lot to do with the economy and areas of gentrification. I think there is a lot of opportunity in the area surrounding WSU. With the schools growth, massive amounts of investment (innovation campus for instance), and growing influence in the area; I think there is a lot of opportunity for gentrification through coordinated investment.
Wichita as a whole might be struggling to figure out how to grow the economy faster, but I think the city and WSU is making the right moves to make that happen. There is a lot of money going towards civic projects and training for STEM. I am definitely optimistic about the future.
hope this works out for the OP but I have a bad feeling about it.
I’m not sure how the price to buy vs build works out in the long run though. I’m in “rural” California and I couldn’t build my rentals or my primary home for anywhere near what I can still buy them for. I bought my primary for ~50% of its pre crash value as a short sale and it’s still 150k below that.
I'll take IRR on nicer properties all day long over war zone cash flow, especially if I'm thinking of passing the assets down to children.
If you're buying around WSU - I think it depends on the quadrant you're buying. I went to school there and lived not to far away for 12 years until I moved last year.
Anyways - somewhere at WSU they have an architects drawing showing what their future plans are - I believe most of their projected growth is from 17th St to the S bounded by hillside/Oliver of course - one of the Farhas has known this for a while and that's why he owns most everything within a block or two of 17th and hillside. I'm thinking they dont plan to expand much past Fairmont park -- maybe just on the Southern edge of it and I think most would be on the W side of Fairmont.
I've seen a drawing of it once - cant remember where - I also use a plumber that was a master plumber at WSU for 30 plus years and he retired this past January - he's seen it as well. So hopefully you're buying close to there.
Unfortunately racism and prejudice blatant or subconsciously in our town will keep the other quadrants down - only other neighborhood I'd hold out hope for is the estate lots NW corner of 21st/Oliver down to Sorority Row and N in about that line to 29th St - the southern half of that neighborhood was the old Wichita Country club if I recall. Think that whats Braeburn was originally built for - back in the 50s or 60s or so I've been told by some old timers. Neighborhood went heavily minority but I think there's renewed interest in it as most people who have owned those homes with larger lots are going to the grave before they sell -- I wanted to move in that neighborhood pretty bad but could never find the right deal. Best bang for the buck and what I hoped would be future appreciation for the land and size of house you'd get.
The heavily minority neighborhoods SE of 17th/Oliver, W of Hillside between 21st/17th or to the South and about the cemetery on 21st W to Hillside and North I would hold no hope for much if any appreciation in your lifetime. I'd like to hope Im wrong but I think our society speaks for itself.
@Jonathan R. I’m from Wichita and visit ever Christmas. I’m amazed at the growth in Downtown Wichita and the area around Hartman Jack, Delano, I think. With the new stadium and the development along the river (finally) there would seem to be good opportunity around there. There are some bungalows along 1st and then off I think off Seneca on the other side of Riverside, that would cost a fortune here in Atlanta.
I bought my rentals in Atlanta with appreciation in mind as well as cash flow. I bought in areas were there wasn’t a ton of growth, but was near areas that had changing demos. Population actually decreased, but incomes greatly increased and so did housing prices. Part of that was due to increased interest in Intown areas.
I see apartments spring up in old downtown Wichita in former office buildings. I would think with all the development and interest if you buy right it should be a good investment.
I don't think there is anything wrong with investing in those areas, however, you know what you are investing for when you buy there. I wouldn't bet on any appreciation in a "war zone" but what you can bet on is debt pay down and cash flow. Most commercial lenders are looking to loan on 20 year terms anyway so in your case, the properties should be fully paid off 20 years from now. You won't necessarily pass on appreciated assets, but you would be passing down fully owned assets that generate good cash flow as long as they are well maintained. There would even be better margin to account for property management to watch the properties if your children don't want to.
To summarize, I don't think appreciation on your "war zone" properties will make you wealthy. Your debt pay down and cash flow from those properties will.
@Stephen Burtin well said. Yes, cash flow play only is my mentality. After I replace my W2 income and then some, I might venture into other classes of real estate. I just closed on my 4th door earlier this month and am poised for a 5th by the end of March 2019 I suspect. I do like making a nice property for someone that might not otherwise have had one, and it feels good improving an area of town that certainly needs it.
@Jared Viernes thank you for your reply! Man, you nailed it. We do have a pretty active and cool group on BP here in Wichita. This string was featured for a while because of the number of responses. I appreciate your time.
If you're buying around WSU - I think it depends on the quadrant you're buying. I went to school there and lived not to far away for 12 years until I moved last year.
Anyways - somewhere at WSU they have an architects drawing showing what their future plans are - I believe most of their projected growth is from 17th St to the S bounded by hillside/Oliver of course - one of the Farhas has known this for a while and that's why he owns most everything within a block or two of 17th and hillside. I'm thinking they dont plan to expand much past Fairmont park -- maybe just on the Southern edge of it and I think most would be on the W side of Fairmont.
I've seen a drawing of it once - cant remember where - I also use a plumber that was a master plumber at WSU for 30 plus years and he retired this past January - he's seen it as well. So hopefully you're buying close to there.
Unfortunately racism and prejudice blatant or subconsciously in our town will keep the other quadrants down - only other neighborhood I'd hold out hope for is the estate lots NW corner of 21st/Oliver down to Sorority Row and N in about that line to 29th St - the southern half of that neighborhood was the old Wichita Country club if I recall. Think that whats Braeburn was originally built for - back in the 50s or 60s or so I've been told by some old timers. Neighborhood went heavily minority but I think there's renewed interest in it as most people who have owned those homes with larger lots are going to the grave before they sell -- I wanted to move in that neighborhood pretty bad but could never find the right deal. Best bang for the buck and what I hoped would be future appreciation for the land and size of house you'd get.
The heavily minority neighborhoods SE of 17th/Oliver, W of Hillside between 21st/17th or to the South and about the cemetery on 21st W to Hillside and North I would hold no hope for much if any appreciation in your lifetime. I'd like to hope Im wrong but I think our society speaks for itself.
Great post, Shane. You are well informed. I must not be, because all of my rentals are out of the nice area you describe. :) I guess I’m in the cash flow quadrant. Ha, see what I did there...?!? I appreciate your effort on this string. You’re awesome!
I know of someone who has bought primarily in low income d neighborhoods. He buys for low money like 10k-30k single family units that are 3 bedroom, he makes sure they are up to section 8 codes then finds people to rent them through section 8. He then rents them out for section 8 three bedrooms around 850 a month. So after he has them for 2 years they are paid off....they continue making money and he buys more. he usually buys 10 a month now off the profits from the others he has. He usually like to try to buy in the same neighborhood. Once he was in a winning side of things and he had 20 houses in one neighborhood and the city decided to buy them using eminent domain. He got paid what a house in that area would sell for plus what he would lose for seven years in rent. So he went and bought about 50 more houses in another close area. His thought was if they fix up this area the one to the south of here will be moving up and would make him some good money. He made lots of cash constantly, and keeps growing. Of course he has issues that he works with that most landlords of better neighborhoods don't have to. But he told me he started investing at 30 and at 50 net worth around 2.5 million. and he has a positive cash flow of around 70 k a month. Good luck