Property Manager · New York, NY · Member since 2010 · 27 posts · 4 votes
Seems like different Investors have different uses for replacement cost in terms of valuing potential investments.
The way I understand it, in general, when replacement cost is above the cost of acquiring an equivalent existing property, you can charge less rent with your existing property acquisition and still achieve the same return as the Developer who must charge a higher rent on his newly-developed building, so you stand a better chance of getting tenants. Therefore, generally speaking, when acquisition cost of existing property is greater than replacement cost, you are better off developing a new building. This all assumes land costs are equal and all else being equal. I know that this also depends on the product-type you are building - class A, B, etc.
What are your thoughts on replacement cost as a measure of evaluating an investment deal?
Investor · San Ramon, CA · Member since 2011 · 1k+ posts · 569 votes
14y
Basically you're asking buy or build?
For me, the decision is easy... I lack the necessary knowledge and background to build so I evaluate a buy based purely on the fundamentals of that buy versus what I believe I could get for my money in other investments with the same sort of risk and time commitment. But if you truly had the option to build versus buy, that could complicate things if you had limited resources and wanted to absolutely maximize your returns... be curious what others say.
The place I'm buying in a few weeks has come back with replacement costs 2 and 3 times what I'm paying for it according to the insurance people. One quoted at what I believe it'll appraise at ($85k), one at their minimum policy ($100k), one at their replacement cost estimate ($160k), and one at their replacement cost ($200k)... good golly. I'm buying the place for $72k... for $200k I'll burn it down myself!