Depreciation is Real - Don't get Caught Like I Did!

[Ben Leybovich]

Took a call yesterday from a local investor. She is looking to "unload" some units. The problem - she wants above market prices...:)

And here's how this happens:

She owns a PIG. Translation - a building similar to the ones you CA guys buy turn-key in Ohio. You know - 70 years old functionally obsolescent crap with lipstick on it - you know the ones?!

BTW - looking at my T12, 3 out of the 4 houses I still own in my portfolio in Ohio lost money in 2014. Can you guess why - CapEx, otherwise known as replacement of depreciated components. Just sayin...

Well, she tells me that she'd just spent $35,000 remodeling the down-stairs unit (it's a duplex) and she wants that money back...

I spent 30 minutes on the phone (cause I am a nice guy) explaining to her that replacing electrical, plumbing, windows, fixtures, and all the rest of it was something that she HAD TO DO in order to make the place stay alive, but none of those things improve the rent or add to the value. At the end of the day, what she still has is a pig; just has some lipstick on it.

Depreciation is not just a tax break. Real physical items depreciate over time and eventually exhaust their useful life, at which point you MUST spend the money. But, you won't get it back.

Don't get caught by the real depreciation y'all. You can thank me later...or now :)

[Jay Hinrichs]

@Ben Leybovich

 Your statement can be made of any town any city in America... it does not matter if you buy a 1920's built home here in Portlandia, the issues are the same... the difference is location and do you have an exit if you need to exit.. cap ex does not increase rent as you mentioned..   It is why values are where they are at by region... And why you have the great appreciation Vs cash flow debates..  And why its critical if one is buying cash flow properties to know what they are buying and the condition of the major components in the homes.  Some of the most bullet proof homes I have ever financed were the little brick bungaloo s in Detroit.. those houses were built to last.. once you had new water sewer elec windows roof.. you have a home that could last for a few decades.. And now what I really like is what some of the guys in Chicago do with those same type of brick buildings that were built by craftsmen of yesteryear.. the guys I have been funding take them all the way down to the studs  so its a awesome brick shell and everything is new inside  everything. So its basically new construction.. But of course the values are far greater and the price of entry higher but for rental stock its pretty nice stuff...

35k to remodel or upgrade one unit of a duplex is pretty high unless it was a studs out remodel.. then  she has another 30 years to recapture those out of pocket costs.