Older homes...good investments or money pits?

Question

Hello All,

My husband and I are BRAND NEW to the investing arena and have been in our education phase tip toeing around the hot lava that is "analysis paralysis".

We are considering taking the plunge and opting for the "house hack option" in a du, tri, or fourplex so that we can "live for free" and spend extra money on advertising (we are very attracted to the seller financing option) or saving money for some down payments on "flips" trying to get some capital coming in for our end goal of buy and holds.

Our town is very historic, there are a lot of 1800/early 1900 homes. These homes are very large and as a result, many have been turned into multi-family homes. We have found one that we are interested in purchasing (a triplex) that seems like a great deal with great cash flow. As I mentioned, we intend on "house hacking" and living in the 3rd, larger unit, of this property. During my research, I went on the county auditor's site to see past purchase prices, taxes, etc and noticed that an investment company purchased this home in 2016 and they are who are currently trying to sell the home.

This particular home was built in 1908, and the house description uses many buzzwords about "newer" this or "improved" that while also using "charm" (read - old). It does seem like a good deal, but we are brand new and I feel like maybe it's a red flag that an investor is selling this home less than a year later?

Should we avoid these old homes (that make up a large part of our market) due to unpredictable and potentially expensive maintenance costs? Is it common place for an investor to sell properties like this that quickly and it not be indicative of a larger problem? What are some questions we could ask the seller to figure out the behind the scenes of what, on the surface, seems like a great deal? (i.e. - maybe there are tenant issues, or a costly repair that needs done, or maybe it's a money pit and they want out). What are some things to consider when dealing with old homes?

Thanks in advance for any insight you can provide!

Nick Feyereisen · Answer

I would avoid 1908 for sure. Im a general contractor and have looked at many of these from a investment side. They are so far out of todays building code, that you will be updating or most likely replacing everything in the home. There are many items to consider here. Pre 1978 home so there is lead paint everywhere on this home. You will pay more to have it painted due to the EPA guide lines for lead paint and construction.   wiring and plumbing will need to be replaced , im sure they have been updated to some degree but still once you touch it, its usually bigger and more than you expected. With that being said you can plan on it costing more and taking longer to rehab. The only way I would consider a house this old as an investment if you are getting it at a extreme discount. I dont know what that is your market. and if you do consider to buy make sure to run plumber,HVAC and electrician through the property for prices before you buy so you know what shape the property is in. hope this helps and good luck to you.

Elijah Smith · Answer

Look I keep hearing about house about this thing house hacking what is this? Or just another name for something else

Scott Hamilton · Answer

I've worked in Urbana since 1994 and understand your dilemma.....I am also new to REI. There seems to be a lot of new commercial construction taking place here now which may drive rental demands. Myself and another investor from the area are at least planning to evaluate some properties fairly soon.  Best of luck to you guys and feel free to reach out if you want to kick around investment ideas.

Elijah Smith · Answer

Thanks everyone now I know!

Macie Moore · Answer

@Shawn Q. thank you for the response! The property description identifies them as "motivated sellers". So, I definitely think that they'd be willing to provide what we ask. I do get nervous about the age, but understand that that is the market I am in and just want to factor that into my deal criteria so I can act quickly and not be discouraged by the age! I definitely need to find a quality contractor, that is the area I am currently struggling with. I feel like a bad contractor could make or break these deals for me!

Shawn Q. · Answer

We have a lot of older stock in my area as well, and I own 4 SFRs that fall in the 1920-1950 range. While older isn't necessarily a deal-killer, there are a few considerations I look for:

• The short-term 'flip' nature of the previous owner is a red flag, for sure. But it just means an additional step in your due diligence. Ask for copies of any permits and invoices for the 'new' work mentioned. If they won't (or can't) provide them, just walk away. You want to be able to talk to their contractor (to see what they did), do reference checks on their contractor (to see if they have a reputation for quality), and assess the scope of work (did they put lipstick on a pig, or remedy some of the more critical issues an older dwelling would have). 
• Like @Nick Feyereisen said - walk through it with your contractor. If you have a good one (and you'll need a good one for an older home) they'll be able to tell the quality of the work, and what might need to be remedied soon. 
• I (possibly) disagree with Nick on the possible scope of the work. It depends on how much rehab you're planning on doing, as minor (non-permitted) repairs could be grandfathered in and you'd be unlikely to run into major systems replacement requirements unless you're planning to do a gut rehab. But that's all dependent on local laws.

In any case, write the above requirements into your offer. If they balk at providing permits, I'd walk. Invoices they may see as proprietary, but I would hold firm on those - though you could offer to have them remove the amounts so you could see the scope at least. And remember - there's always another property! They're the seller, so they need to sell you on the value of their product.

Macie Moore · Answer

hi Elijah, sorry for not seeing your reply to my post, must not have these notifications figured out yet! Casey is right! In our case we intend on using an FHA loan which has a low down payment requirement, to acquire a multi-family unit and rent out the other units so we can live for a reduced cost as our tenants would pay our mortgage. FHA has owner occupancy requirements, which is usually a year. At that point we will refinance to conventional and get another multi with FHA (at least in my are you aren't allowed to have more than one at a time). Also, what my lender told us, was anything above 5 units is not FHA eligible, and you would then need a commercial loan.

Hope that helps!

Macie Moore · Answer

Hey Scott! Great to hear of another investor in the urbana area! We are also new to REI , however I am nearly finished with my real estate license requirements so I've been pursuing other areas for awhile. We are currently researching seller financing strategies and terms to hopefully be acquiring 3 sf properties. 2 in urbana and 1 in Mechanicsburg so I am really hoping we will acquire properties soon! Urbana is a unique town but I think a good investment opportunity :)

Older homes...good investments or money pits?

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