Age of buildings / long range plans

[Kenneth LaVoie]

Good day. With a year under my belt, I hope I can still post in the "just starting out" forum! Some days I feel like I've been doing it all my life, others feel like I'm all thumbs!

My question is about "long range" planning in regards to the age of buildings owned. I've read a few threads advising the purchase of newer units because a higher % is allocated tax wise toward the building (improvements) vs. land, so the depreciation deduction is greater. Also, and more importantly in my case, they warn that older buildings may need serious capital expenditures in the future JUST when you don't want to be hemmorhaging cash, such as the first few years of retirement.

In my area (Waterville, Maine), we have mostly buildings built between 1890 and 1940 for multi's. Now shouldn't I be ok as long as they are structurally sound, and heating systems are up to date?

Everything is cash flowing pretty well, but I want to make sure my long term strategy will work. (i.e. buy, improve, hold and rent forever and ever, amen)

[Bryan Hancock]

Don't let the depreciation tail wag your profitably dog. There are tons of areas of the country where the bulk of a valuation is attributable to land costs that are non-depreciable instead of improvements.

The key is whether or not the project makes sense WITHOUT the paper depreciation expense. Don't let your accounting team run your project or make decisions about what makes sense. Depreciation should be seen as a bonus and not as a fundamental piece of a deal when you decide if it makes sense. As your portfolio grows the incremental value of the tax shield for your first project will get smaller. If you did the project mainly for tax reasons then you will lose most of this advantage because there are plenty of paper losses in subsequent projects.

All projects make sense at some price. The key to buying older buildings is to be overly conservative with accounting for capex. Get a very good inspector and have them be pessimistic when they do your inspection. Once you have a list of older items that would be fully depreciable on a chattel appraisal build those expenses into your pro forma for the project and assume you will have to replace them in a reasonable amount of time.

If you get the right type of loan you can take a "deferred maintenance credit" for some of the capex that will need to be done soon after the closing. This limits your cash in the deal with the seller. I know many investors that gross up the sales price after they do an inspection so that they can ask for the credit at closing and give the seller the same cash or terms for their equity.

Hope that helps some...