Buying a Historic Home as a Buy and Hold Rental Property?

Question

Hello BP community!

We recently moved into a foreclosure duplex that we purchased downtown.  It was built in 2007 and only needed paint, cleaning and some fixtures.  All in all, it's been a light rehab in comparison to most of the historic properties that surround this one.  This was an unusual find and we don't expect to get another deal like this one anytime soon.  We purchased it for $139,000 and the lower unit rents for $1,050 a month.  We are currently living in the top unit and it's safe to assume we could get the same based on the demand and response we had for the lower unit.  My question to you guys is this.  The downtown area is full of historic homes that are currently for sale at a discount due to the stigma and "crime" in the area.  Our goal is to purchase 8 more properties in the next 3 years.  We are looking at Historic homes but it goes against our principal rule of buying 1980 and newer.  I don't know much about historic homes and quite frankly I don't understand how most of them are over a hundred years old and are still standing!  Does anyone have any experience they could share about the type of maintenance they require and any headaches associated with owning one?  Is there any advantages to owing  something Historic?  We're these homes built to any sort of code?  Are they really a worthy investment?  A lot of them sit on prime real estate which is a nice bonus!  Thanks Chris

Blake C. · Answer

Here are some things to think about:

1. You say it has a sigma... it this getting better or worse. If this is an area that used to have a worse reputation, but for some reason more people are wanting to live in this area (closer to work, hipster appeal, whatever), then the market is moving in your direction. If its still declining, personally, I wouldn't want a part of any declining area.

Things that tend to go bad that I would want to factor into my purchase price of an old home if they aren't already done:

1. What is the water line made of?? If not copper or Pex, you will likely have to replace this.

2. Has the sewer and gas lines been replaced in the last 25 years. If not, this could be an issue down the road?

3. Mechanical... if its older than 15-20 years, its moving told the end of its life.

4. Wiring - Is it Copper and Romex? This is good. I don't love aluminum wiring or knob and tube. The older wiring can cause problems down the road. If its has fuses and not breakers, this isnt good.

5. Termite damage - this can happen to any home, but older homes have had more time to be exposed if this is an issue in your area.

If the above five things have received attention in recent years, this eliminates many of the negatives of purchasing a home pre-1980.

Account Closed · Answer

@Chris Nelson

No, I wouldn't do it.  Though I love historic homes, it's not appropriate in my opinion as a long-term buy and hold investment.  Maintenance expense will be significantly higher and your control over the property will be lower (there are restrictions on changes you can make with historic houses).

If you do pull the trigger, make absolutely sure you budget sufficient maintenance & repair cost into your analysis.  If you do, I'm doubtful the investment will make financial sense and generate a decent return.

Best,

jon

Julia Blythe · Answer

My husband and I live in a house built in 1907 and we are currently in escrow for one built in 1912, 1924 and 1947.  I agree 100% with Blake's list above.  To add a little more detail to his list:

1.  Water Pipes - Make sure the pipes are not made of lead (and if they are, simply take that into consideration when making your offer).  On 2 of our 3 new flips, ALL of the plumbing will need to be replaced, as they are lead.

2.  Sewer Lines - We always make a point to have the sewer line scoped before buying to see what we are facing.  Throughout our "FARM", there are very mature large trees everywhere and the lines are made of clay and the roots can crush the sewer lines.  Having to replace the sewer line from the street to the house is very costly.  With terracotta, there can often be roots that will grow inside the lines and cause plumbing backups.  This is VERY common and many people in my area (historic neighborhood) get their lines roto-rootered out once a year to avoid problems.  I have heard that this weakens the clay pipes each time it is done, so you may want to just have it done when there seems to be a problem developing (toilets flushing slowly or stopping up).

3.  Mechanical - Old things eventually break.  Enough said.

4. Electrical - 2 out of 3 of the flips we are doing are either all knob and tube or a combo of the two.  They will be getting completely new wiring.  Because of this, most of the walls will be taken down to the studs.  In one of our flips, the walls are made of terracotta blocks that then have plaster on top of that.  Most of the electrical is currently run on the outside of the walls and the electrical plugs are very limited.  FUN TIMES!  $$$$

5.  Termites - Although termites are a huge issue in our area, we have been very lucky .... and hope it stays that way!  A little damage here and there is not a big deal although it seems some people panic at even the suggestion of it.

I would only add that despite the points above, renos in general cost more due to dealing with plaster versus drywall, along with other things.  If you don't have to take down walls, all the better!

Good luck!

Penny Myers · Answer

First, excellent buy! Especially if financed as owner occupant. Once you decide to rent both units, two incomes/one mortgage! Very important in today's world of non-lending.

My partner and I are REIs in your area - and downtown is hit or miss as far as gentrifying areas. Castle St is trying but not quite making it yet. Areas to the north are really popping and will continue with the amazing riverfront development. Carolina Place is an anomaly driven by passion for the area and investors are selling with ARVs of $160+ psf because of it.  But the fact remains that you will be dealing with really old homes that require specialized expertise. When you get killer deals and can hire skilled and knowledgeable vendors, you may be on to something if you're really passionate about older homes and the hassles of bringing them up to code.  When it comes to rentals, we're passionate about good tenants and rent receipts. So we don't let passion get in the way of the Benjamins - typically. We have not had a focus on the older homes - especially for buy and hold. We stay in the post 60's era homes but we recently ventured into a 40s era bungalow. So cute! How charming! Great condition! Great deal! Bull Shizzzzzz!! It has been a pain in the arse - we as seasoned investors should have known better. But all of our investor buddies are doing it. Why can't we?? Never again. Wee'll stick with the solid, well-located brick ranch any day.

Blake C. · Answer

@Chris Nelson I wouldn't call them deal breakers. For me they are things I have to factor in. One more is a roof. If it has lost more than 50% of its life, I need to start accounting for replacement. I really use this when factoring in plumbing, electrical, mechanical, and such. I would buy one that needs all this done, and I might not do it all immediately, but I would want to begin factoring the need to do so into my purchase price.

Chris Nelson · Answer

Very good points guys!  Blake, I like how you broke it all down into 5 specific deal breaking criteria.  Thank you both.

Bill Jacobsen · Answer

Just my experience and opinion.  A home that must retain its historic characteristics will probably cost more than other homes.  The rehab can cost more with less options on how to restore.  The expenses do not have to be more if it has been previously maintained.

You can not necessarily  get more rent just because it is historic.  Sometimes the square footage is less efficient so you actually get less rent.

I don't know that there is anything that would preclude me buying again if the numbers worked out.

Just my opinion on limited experience.

Good Luck.

Bill

Buying a Historic Home as a Buy and Hold Rental Property?

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