Older rental close to city center or new construction on outskirts?

Question

This year I sold an older SFH rental (built 1979) I had with no deferred maintenance in Plano TX in order to 1031 exchange it for a similar sized new SFH rental in Melissa TX (built 2021). All cash buy. The older property was close to two major highways with loads of businesses, restaurants and amenities nearby and closer to the center of the DFW metroplex. The new property is in a growing city that is on the outskirts of the metroplex close to one major highway with limited businesses nearby. School districts are similar.

Why the swap? Maintenance. Despite keeping up with it, these older houses always spring up new problems. Not to mention the sewer pipes are cast iron and in this case was getting close to the end of their useful life (50 years). I already had to re-route the main sewer line once. I am retired and older now and don't want to deal with the hassle. Not only that but the newer house is much nicer and gets the same ROI. I should also point out my wife is a RE broker so transaction costs are negligible. We pay buyers agent 3% and then get paid 3% by the sellers agent on the other end.

Now I am thinking of doing it again next year. This time with an older SFH rental (built 1960) with no deferred maintenance in Richardson TX in order to 1031 exchange it for a brand new construction in Denton TX, all cash. On one hand I should probably just stay pat and pay for the maintenance. After all it's all about location, location, location, and I am giving up good central locations. On the other hand having new construction that I won't have to worry about for at least 10 years and can wait while the city expands around it sounds relaxing. Which would you choose?

Robert Steele · Answer

I think that's because we are in different markets @Kevin Sobilo

The majority of houses around here are 1950's or newer. I have heard from plumbers that cast iron sewer pipes come in 50 and 100 year life expectancies. My own experience with having to do many sewer line re-routes and repairs (on houses built in the 70's) is that whatever they used in DFW is not the same as what they used in your neck of the woods. The plumbing company I used for years actually stopped doing small stuff and just started focusing on that as there is a large market for those repairs. Granted, I could be conflating some of this with slab leaks as we have lots of foundation movement here. But I specifically know I have had to abandon these cast iron lines outside the slab too.

All my arch shingle roofs have been replaced at least once if not twice over the past 20 years. We have frequent hail storms. So I guess I'll never know how long they would actually last.

That is a good point about better the devil you know. I know my own properties intimately and they are well maintained. Swapping for something else there is always going to be an element of risk. Even brand new homes when you figure out later that the yard wasn't graded properly and you get water in the house every time you get a strong rain storm. Or that the city didn't inspect the sewer line hookup to the city mains (at all or properly?) and sewer constantly backs up. Ask me how I know these things. :)

Bruce Lynn · Answer

Different areas must have different life expectancies or issues. We're in DFW area of Texas and while I have seen 100 year old cast iron, I see plenty deteriorate after 50 years. It just crumbles apart and crumbles and crumbles. Not sure if it our dirt, or the moisture in the soil, or maybe the jalapeños and hot sauce we eat. You just never know until you have a problem or start digging. At about 50 I am eagle eyeing all the neighbors to see if I see PVC cleanouts all over the neighborhood. Then either skip it or budget for it, if it has not been done already. If we have to level a foundation on a 50 year house more than a couple inches, we're probably going to break stuff and then have to fix more stuff....like cast iron.

Roofs, we're lucky if we get 8-10 years out of 20 or 30 year shingles. Hail and wind does the damage. A few years ago my next door neighbor got 2 in one month. I had not replaced mine yet as my roofer was a little slower, so I got 2 for 1 storm damage. 1 roof 2 storms. It is extremely rare here I would see a 30-40 year old composite shingle roof that is still functional. I probably have seen one, but not that common.

Robert Steele · Answer

Thank you for your very well thought out reply @Bruce Lynn

That is a good point about buying near new rather than new and for my intended purpose it is basically the same. In that case I should probably look for near new so that I can get a gauge on the neighborhood first before committing. I know the kind of subdivisions you are talking about and I have also walked through houses like you mentioned. The ones that were bought new and basically never had any maintenance done on them in a decade or more.

I fully expect to replace the heater and HVAC on new construction, but I should get at least ten years care free I would hope. I also know what you mean about these builders putting in the cheapest hardware they can find. Dishwashers and water heaters particularly stand out from what I've seen of late. I always go for four brick walls. I do not want the added maintenance of exterior painting if I can avoid it.

I did not consider PEX. That is a good point. Especially after the last big winter storm we had here a few years ago.

I am a long term landlord. I have a few that I have held so far for 23 years. Given that I intend to hold on to my portfolio for at least that long again, then having something newer now, rather than older makes a big difference 30 years down the road, as you say.

P.s. It's funny you should mention Princeton. My wife put the kibosh on buying new construction in that area last year.

Kevin Sobilo · Answer

@Bruce Lynn, in a way you have it easier with roofs because I guess you never need to budget for them as its always included in your insurance since they never wear out they just get replaced from storm damage.

In my area storm damage happens, but isn't a common reason to replace a roof. I buy houses with roofs that are 20+ years old and if they are decent or fixable don't replace them right away. Ideally, I'll replace them around the 30-35 year mark when they are REALLY worn out.

I've never had a sewer line fail yet and when one does I doubt it will be a cast iron one. In my area there are some old house with clay sewer pipe which are brittle and more prone to break or fail because of root infiltration at the joints.

On the plus side, when one does break I may do the digging myself with my little backhoe. So, if I'm able to do that the cost shouldn't be too bad.

Kevin Sobilo · Answer

@Robert Steele, better the devil you know!

First off, ALL of your houses are "newer" in my opinion. Where I am any house built after 1960 would be considered pretty modern because the majority were built 1890-1940. The NEWEST house I own was probably built in 1942 in fact.

When you stated that cast iron sewer pipes have a life expectancy of 50 years, that seems a GROSS underestimation. I believe municipal authorities use 100 years as the guideline for replacement of cast iron pipes that are underground and those will deteriorate faster than those within your house.

I have cast iron in most of my houses except where I have done work and replaced it and only in a few limited circumstances have I had any kind of failure. I am rehabbing a house now that is ~100 years old and there is one small section near where the pipe exist the building and where an old exterior downspout used to connect in where the pipe is leaking a little underneath but its a 100 years old and at a point where it would have gotten more a lot more wear from that exterior downspout.

My point is that expected lifespans are often very conservative. Another good example is roofs. A 25 year architectural shingle should in most cases last 30-40 years with a little maintenance and perhaps some small repairs along the way.

Back to my original point. You have a track record with the house you own. You know that it is well maintained no matter how well you inspect anything you buy you don't know its issues the same way. Even brand new homes have defects and you won't know about them until you own it and have that track record.

Unless the one you own is a real dog, I would be inclined to stick and stay and make it pay.

Bruce Lynn · Answer

What I've seen and analyzed is better not to buy new construction, but maybe 2-3-4-10 year old construction, unless your wife is getting 5-6% from the builders, especially since you are all cash.   Especially if you can get them at a discount to new construction.

I think there is a time for both and I think it depends on where you buy.  I was in a new construction community not long ago in Princeton.  Probably 1/2 the sales were to investors from one ethnic group.  Long term I don't think that will fare well for appreciation in that particular community.  It already looked pretty messy, and I don't think that gets better.   There are some investors like you who keep properties in good condition, maybe make an upgrade every time or every other time they go vacant, etc.  These seem to get the best rent increases and appreciation.  Others have the philosophy of never doing any maintenance and more or less to me just running the properties into the ground.   These seem to not get the area rent increases and I'm sure probably sell at a discount on exit because the of the poor condition and deferred maintenance.

I think no maintenance on new construction is somewhat of a myth in many cases.   For the most part on older homes, but probably every home the main repairs are water heaters and HVAC units.  Seems like those are about every 8 years, depending on if you maintain them or not.  So much of the new construction no longer puts in quality materials, so you could have just as much maintenance.  Cheap door hardware, cheap HVAC and water heaters, cheap plastic part faucets and the like.  Roofs are probably every 10-15 years depending on your luck with wind and hail storms.  More hardy/Masonite vs brick in many cases.   We'll see how that holds up.

As you note though, it probably depends on the age of the house.  Cast iron or clay to PVC is not cheap..and you just never know how long it will last.  I've seen 50 and I've seen near 100 years I think. If they're built now in the 1970s or before, one thing I am looking at is if they have done that and look up and down the street to see if the neighbors have switch out.   Also look to see the brand of HVAC.....I've seen plenty of Tranes, Rheems, Carriers last for 40+ years, while the Goodmans seem to be good for about a max of 8.

I do like the PEX on new construction.  I was pretty worried about the ice/cold storm 3 years ago, but it seems to have held up very well.  I ask lots and lots of people about their experience and no one I've ever talked to seemed to have a freeze issue with PEX.  Some people seemed to have issue with the tankless hot water heaters, especially if they were on the north wall and unprotected from north wind.

Never really had any electrical issues, but I keep thinking as we move forward newer electrical will be a bonus.  More ARC fault, maybe more plugs, LED lights and such may make some difference.

I think it can also depend on how long you intend to hold them.   If you buy a 50 year old house today and plan to hold for another 30 years, that is an old house when you or your family exit.

Older rental close to city center or new construction on outskirts?

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