Old Houses (1920's and 1950's) as Rentals

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Old Houses (1920's and 1950's) as Rentals

Matt Wray
Charlotte, NC · Member since 2017 · 2 posts · 0 votes

In the market that I am looking into there are some neighborhoods that appear to cash flow really well. I would describe them as upper lower class areas. A lot of investors in town own rentals in these areas. However, the homes were built in mostly the 1920's in one area and the 1950's in another. I'm trying to sort out all of the issues that I've learned older homes can have. Lead paint, asbestos, outdated electrical and plumbing, sewer lines, old pier and beam foundation, on and on. My head is spinning! 

These neighborhoods will almost certainly have flat appreciation but could cash flow very well as rentals. Would it be worth it to do a major improvement like say update the plumbing on a 1920's house? I guess my question is what should I prioritize to have a stable rental property in decent condition without investing too much into repairs and upgrades in an area where the market will not reward them?

One example, there is a duplex available that I could get for about 40K. It has tenants in both sides and could generate 1000/mo gross rent. The house was built in the 1950's. It has a new roof, but nothing else has been upgraded. Those are attractive numbers, and I know a good property manager who could handle things on the tenant side, but I am concerned about getting hit with big Capex expenditures on a property that's not worth it.

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  • Pavs Doychev
    Waterford, MI · Member since 2015 · 24 posts · 15 votes
    9y

    I work with properties like this all the time, Its really goes house by house bases.. If property was maintained well, I would get your inspector out to confirm the condition and give you a general list of what should be replaced first. 

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  • Jon Q.
    Investor · Berkeley, CA · Member since 2015 · 1k+ posts · 713 votes
    9y
    Originally posted by @Matt Wray:

    In the market that I am looking into there are some neighborhoods that appear to cash flow really well. I would describe them as upper lower class areas. A lot of investors in town own rentals in these areas. However, the homes were built in mostly the 1920's in one area and the 1950's in another. I'm trying to sort out all of the issues that I've learned older homes can have. Lead paint, asbestos, outdated electrical and plumbing, sewer lines, old pier and beam foundation, on and on. My head is spinning! 

    These neighborhoods will almost certainly have flat appreciation but could cash flow very well as rentals. Would it be worth it to do a major improvement like say update the plumbing on a 1920's house? I guess my question is what should I prioritize to have a stable rental property in decent condition without investing too much into repairs and upgrades in an area where the market will not reward them?

    One example, there is a duplex available that I could get for about 40K. It has tenants in both sides and could generate 1000/mo gross rent. The house was built in the 1950's. It has a new roof, but nothing else has been upgraded. Those are attractive numbers, and I know a good property manager who could handle things on the tenant side, but I am concerned about getting hit with big Capex expenditures on a property that's not worth it.

    You gave good reasons to be concerned.  Properties built prior to 1970, definitely could have greater risk associated with them...make sure on your inspection exactly what has been updated and what hasn't.  The annual maintenance expense you budget should be higher than properties built after 1990s.  Also, make sure the rent is high enough to justify the added risk and that the quality of the neighbhorhood is good.  Sometimes older properties can be good deals especially if they're in desireabke areas (ex. Pineville or Ballyntine in the Charlotte Area), but they can be bad deals if they're in bad areas surrounded by houses that haven't been properly maintained (many of these areas in Charlotte as well).  I know in charlotte there are areas that have fallen by the wayside and often, although you get acquire these properties at lower prices, attracting high quality tenants to live in old housing in these sun-par neighbhoods will be a challenge.  It's no surprise that sub-par housing in sub-par neighborhoods attract sub-par tenants.  Though there's money to be made, it's not who I choose to serve as it's not the life I choose to live (ex. hassle tenants, evictions, high cost of property management, etc. .I don't serve sub-par tenants and I suggest you avoid doing so also.

    Overall you are taking on added risk.  Get as much info about the specific property, conditions of major expense items (roof, foundation, plumbing, electrical, HVAV, lead paint test, asbestos test, etc) and the repairs needed... so you know exactly what you can pay for the property.  And make sure your return is equil or greater to the risks you are taking.   

    I don't do deals unless they are clearly good deals that'll conservatively generate my target returns.  I suggest you don't either.

    If the neighborhood is good/desireable and, considering all of the expensis and added risk (negative surprises), it still looks like you'll easily be able to achieve your target return, it could be a great deal.  Based on your comment in re to appreciation though, this seems not to be a great neighbhood so keep that in mind when running your numbers (estimate zero appreciation over hold period in your investment analysis).

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  • Matt Wray
    OP
    Charlotte, NC · Member since 2017 · 2 posts · 0 votes
    9y

    Thanks for the insight @Jon 

    @Jon Q.undefined. I would love to invest in Charlotte, but I have actually been looking in the town that I grew up in in Louisiana because of how high the housing prices are here. I will give Charlotte a closer look now that I am running into these issues, but it seems a 250k+ property in Charlotte generates the same amount of rent as as a 100k or less property in Louisiana.

    I share your concern about sub-par tenants, but some other area investors have advised me that those issues can be  mitigated with proper management. I am still skeptical but looking into it. 

    Unfortunately a good house in a good neighborhood that cashflows is like a unicorn in this market!

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  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    9y

    I stear clear of older rental properties unless some major issues have been upgraded.  Else, buy the property cheap and upgrade right away.   I don't want original 1920s windows because they have lead based paint.   I don't want 1920's electric.   I don't want 1950s galvanized plumbing.  

    Pretty simple - the older the building, the more problems it has.  I have bought lots of 1950s era buildings, which are not that old for my city...

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  • Jon Lee
    Investor · Las Vegas, NV · Member since 2014 · 471 posts · 241 votes
    9y

    @Pavs Doychev, @Jon Q., & @Brian Ploszay all provided great insight on the potential risks for dealing with older properties.

    I have dealt with older properties like this in the Midwest and much of the physical/maintenance risks can easily be mitigated through updating the major systems of the property.  We have home warranties for all of our properties to help deal with the increased cost of maintenance.

    Concerning appreciation...I go into the type of investment opportunities knowing that there is little if not appreciation AND I ensure that it i'm going to pursue the property, I will acquire it at a cost that still leaves me equity (i.e.  I still buy it at discount).  Even if the values are flat in the area...I still have a decent equity position if I choose to (or need to) liquidate one day.  

    The best way to mitigate bad tenants is to have your property manager create a higher standard  for approved tenants than would otherwise be approved.  The lower the vacancy rate in the city or neighborhood the property is located...the higher the standard you can hold your tenant approval to without having the property vacant for an extended period of time.  Stay away from older properties in areas with average or higher than average vacancy.

    Las thing is this....realize that the higher return off of a lower investment cost is inherently a more volatile investment.  That doesn't meant that it is necessarily bad or too risky.  It just means that you have to look at all the ways to mitigate the risk until it is acceptable to you.

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  • Matthew Tringali
    Property Manager · Charlotte, NC · Member since 2017 · 68 posts · 39 votes
    9y

    Ha ha @Matt Wray , the whole time I was reading your post I kept trying to guess which Charlotte neighborhoods those were and then I saw your follow-up post!  If you ever decide to jump into the Charlotte market and want to pick my brain, reach out anytime!

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