All Forum Posts by: David Song

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Diane G. I had thought about investing in 50 k houses in Columbus or some Midwest areas. What I am expressing now is my new thoughts on REI strategy. If I am investing OOS on 50k houses, I might be better investing in mobile home parks in Modesto, which is only 1.5 hr drive away.

Austin Fruechting I agree with that for cash flow investment, especially cheaper houses with lower monthly rent, you must include a higher %for maintenance. If that is properly taken into consideration, and there are improving jobs in the region, 50 k houses are great target. What I will avoid is areas that has low population density, not much jobs, and a over supply of house stock. In cities where there are significant population loss, that is a danger for REI.

DL Martin The construction cost per sf will vary between states and even within a state. $150 is a general number thrown out. You could build it with $88/sf, somebody else may need $250/sf. That is not the point. If the average sale price/sf in a city is significantly lower than the replacement construction cost, that indicates there is no value in the land. Do you disagree with that? E.g., Detroit houses are selling for much lower prices than $50/sf. How much is these land worth? Even using your 80/sf number.

Michael Biggs Actually, Texas is an area that I was interested in. But the reason is about both cash flow and appreciation, not just cash flow. I booked a ticket to Austin last year, but the flight was canceled due to weather. I am still planning to visit the Austin area sometime. It does not matter whether its 50 k or 1 million, it only matters if the location has potential for improvement. If you see a potential for an area to improve, by all means buy those 50 k houses around it.

Wow. I did not expect so many discussions. Anyway, I am just saying a new relegation that I recently recognized. It may be right, it may be wrong. I focus on cash flow also. But in addition to cash flow, I think the land value appreciation is critical in REI. A open lot in San Mateo, 5000 sf, sells for 250k in 2011. Which is close to my properties. I did not buy it, since it has no cash flow. Right now, it is about $700 k-900k. The house does not appreciate, it actually depreciates. If someone argues about that with me, please see how your tax depreciation is calculated. If you find a 5 k house in a good location, by all means grab it. One day it might be 1million, if there are jobs around and school improves. If Texas draws more jobs and people into the the state, those properties will appreciate, because the land appreciated, not the house on top of it. My point is not to focus ONLY on cash flow, and neglect the importance of the location. REI is all about location!

To be honest, I just recently realized this and want to share my thoughts. If you believe that 50 k houses are your niche, then keep doing it. My selection criteria is just different. The land must appreciate based on its location, the cash flow must be neutral or slightly positive. The focus is on location and potential long term appreciation. 50 k houses in a bad neighborhood is a liability to me. Everyone has limited time. Each house need your time and attention. If there is little value in land, I would rather buy an even cheaper mobile home for 10 k. That will cash flow even better than the 50 k house.

What is actual repair and maintenance cost for a 50 k house? Is that really lower than a million dollar house, assuming same lot same interior sf. New construction cost are not that different between states. The land value are the difference. Investing in 50 k houses are like investing in mobile homes, since no value is in land. You will get high cash flow initially, but when you need a roof, or some windows, that cash flow may be reduced quite a bit. In other words, you are investing in the house structure, which is a depreciating house. My criteria is that the average sale price per square foot should be at least 150-200/sf, higher than the replacement cost. This way, if you need to remodel, the money spent actually is worth more. The cap rate may be initially lower than 50 k houses, but you will have better neighborhood, better land value. Ultimately, it should be a balance between cash flow and appreciation. High cash flow, and high appreciation. Appreciation is more important.

A typical house cost $150/sf to build. 1500 sf house cost 225k. Therefore, if a house sells for 50k, the land is worthless. If a house sells for 1 million, the land is with about 700k. We are investing in land, not house. The house will depreciate over time. The capital expenses to repair the house will be detrimental to a 50k house. The ratio of repair cost to total rental income would be too high. A 1500 sf house in Detroit and San Francisco will need about the same repair budget. However, that amount divided by the rental income would be very different. Furthermore, because the land has no value, the repair cost will be throwing money into water. Since a new house there does not worth much. To the contrary, remodeling in a tier one market would add value. Therefore, I intend to believe that 50k houses are not good investment.

Nice job! Genius!