Why not buy historic homes?

Question

I've been reading posts here on BP for the past few hours where a lot of our members are defending both sides of two very classic RE investor battles:

1.) Good neighborhood or bad? (Low cash flow + hopeful appreciation) or (high cash flow + low/no appreciation)

2.) Old homes or new? (Repairs vs. fewer repairs //impact on the bottom line.)

The question I'd like to ask you all is:

Why not buy historic homes in nice, established neighborhoods?

I'll be honest and make the statement that I have absolutely no idea which markets are going to scream in value over the coming decade. Sometimes it makes me sad to look at old the old neighborhoods in Detroit that were once so coveted.

What I've been doing recently in my investing is to take a closer look at historical homes that have had basic improvements in electric and hvac and other necessary updates without compromising the style of the time period. I have a lot of respect for nice architecture and the feel of many art deco homes. I've noticed that many tenants do too. The way I market these homes appeals to people who appreciate art and something beyond a cookie-cutter row house. My vacancies (only 2 so I can't speak to this being a recurring pattern) are less than a week.

An example is a 1926 historic art deco style home I bought from HUD. The beautiful wood floors, many built-in features of the house, and the open floor plan created a lot of buzz. I had a large number of applicants and got to pick which I wanted.

When the insurance company's inspector came out to the house, he said "This home is so much better built than the houses these days. Looking at it, it's so hard for me to believe it's almost 100 years old."

So what I've found is that these homes can cash flow well, appeal to renters that have a sense of pride in where they live, can be very low priced, are often structurally sound, and also appeal to owner occupants as well (allowing for an exit strategy while still requiring a relatively small amount of capital.)

Have you thought about buying historic, structurally sound homes in established areas that tenants respect and still allow you to easily abide by the 50/2 rule?

Steven Hamilton II · Answer

Historic rehabilitation can be a great business. It can be a pain in the rear end to do so correctly; however, if done right its benefits can be substantial CREDITS as high as 25% of certain rehab costs. A credit means dollar for dollar tax. Rather than just a deduction which is a subtraction from income.

Read this: http://www.irs.gov/pub/irs-mssp/rehab.pdf

-Steven

Rob K. · Answer

I stopped buying houses built before 1940 for several reasons:
They are usually full of lead paint.
I don't like wet plaster or lathe.
The foundations tend to have problems.
Often, there's cedar shakes under 2-4 layers of shingles.
I want nothing to do with steam heat. (For that matter, I avoid any heat other than gas forced air.)

I also don't buy houses that have a flat roof. Another problem are additions. I like the house to be original in it's floor plan. When it's beed modified, you start having problems like stairs too narrow or not enough headroom.

I flipped a house years ago that was built in 1880. My dad thought I was nuts. The walls and floors were all perfectly square and level. The foundation was a mess and it also had steam heat with pipes covered in asbestos. The neighborhood was kind of sketchy. I was showing the house to a couple and we looked out the window. The kid next door was in the backyard with his short off and his mom was shaving his back with electric clippers. Hair was blowing everywhere. Those people didn't buy the house. I don't think Tom Hopkins or J. Douglas Edwards have a close for that objection.

Joe Delia · Answer

New or old, as long as it makes sense from a numbers standpoint!

Scott J. · Answer

I own two houses on one lot in the largest historic district in CA (Old Towne Orange). You won't get NEAR the 2% rule--heck, even the 1% rule--in this area. For example, my property is $520k and the two houses would rent for a combined $3,700. Although there is high appreciation.

I probably would not invest here were I not to living in the house. (I highly value quality of life based on my personal residence.) I invest inland where properties are much cheaper and rents are still high.

Seth Bender · Answer

@Rob K. Haha I dunno Tom Hopkins might say it’s good to have families that help each other isn’t it? Then they’ll probably say yes with a really strange look on their face.

Marc Bodinger · Answer

@Ben Siegelbaum I think it is an interesting concept by investing in historic properties. They are probably more appealing than an average because of its historical value. The only drawback to me would be if an appraisal raised a few flags about its conditions but if I got a greenlight then why not give it a shot.

Jeff S. · Answer

Ben Siegelbaum I have 3 places built 1910-1920 and they are solid structures with full cement basements. The plumbing is original.

The close-in areas have the cities original buildings. Young professionals come in and buy 80-100 year old buildings and spend 300k remodeling to make them worth 7-800k.

There are outfits in town that buy these in specific areas and totally gut and redo or tear down. The original price is generally 200-400k.

These places are expensive to maintain but you will never have a vacancy.

Ben Stout · Answer

Rob K That is great information. I will definitely keep all of this in mind when looking at potential purchases in the future. I did a bathroom remodel a while back in a house with lathe and plaster walls and it definitely was an experience.... and a very crumbly one.

Rob K. · Answer

Ben Siegelbaum In that case, I guess it would depend on the foundation. In my area, houses built before 1910 usually have brick foundations. Those built 1910-1930 have the concrete block foundations that have kind of a diamond pattern on the outside of the blocks. All of these type of foundations tend to have water issues. I do own several houses that were built in the 20's. You can still see where the old coal chute was before it was converted over to gas. Those old houses still have wet plaster and lathe, which can be a nightmare if you need to remodel.

A lot of people like old homes and brag about them having plaster. I'm a big fan of drywall.

I'm sticking with my above parameters, but if the deal were right, I would probably break a few rules. Not the flat roof rule, I've had a few of those and they were nightmares.

Ben Stout · Answer

These are great points being made about the historic commission and obstacles to renovation. Do you feel the same if there are grants or other opportunities available from the local government? Do you prefer they stay out of your business as much as possible?

Why not buy historic homes?

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