Desirable today...but tomorrow?

Question

I purchased a duplex built in 1989. It's my first home/investment. Its in an area that today people generally want to live, the other homes are kept in nice condition and new homes are still being built only a few streets behind.

My question stemmed somewhat from the dead horse debate of appreciation vs. Cash flow but I don't want to debate that here.

My home is almost 30 years old. When we look at buy and hold, we think about holding for a long time. So I thought what is the market for my home/rental market going to look like in another 30 years?

The first obvious thing (at least for me) to do is look at the market for today's 60 yr old properties. Or properties built in 1957. Now I haven't yet done this as I've only just begun to question, but a rough draft view of 50's properties is lack of maitenance, lower income renters, toys littering the front yard kind of stuff.

I would really like to hear from seasoned investors who have been around to see these changes or hopefully lack of changes. I presume that much of the thought regarding this is decided prior to purchase? I live in the Midwest, so we don't have fast moving money and big money gentrification to over night change an area.

However, if the population of the world doubles every 40yrs, we could see more rapid change in some way or another.

I'm not trying to ask a crystal ball question. More how are other investers looking at the future of their properties and neihboor hoods as they age. I think likely someone else has seen this play out as real estate investing is not a new idea and I think in many instances we can look to the past for clues.

Thanks in advance,

~Josh

Aaron K. · Answer

Not sure how it works in the Midwest, but in California an older neighborhood does not necessarily mean a bad neighborhood.  The far more important aspect is location.  Is the property near good paying jobs? parks? areas of interest?  An old home in a great location will beat a brand new home in the middle of nowhere every time out here.

David Faulkner · Answer

Look at the supply and demand fundamentals of the market, what is driving those, and if those things are durable or not. In the simplest form, you can look at long term historical pricing to see if/how long/how steady the history of price and rent appreciation is ... there WILL be some fluctuation as RE is somewhat cyclical and nothing ever goes up in a straight line always, but does the neighborhood and surrounding neighborhoods have a long term track record, spanning several up/down cycles of appreciation and rent increase?

What is driving supply? How easy would it be for a developer to come in and build a bunch of housing to meet increased demand? Are there lots of vacant, buildable lots in or around the neighborhood? How easy does the city make it to build? Are there natural or unnatural boundaries that limit growth? Oceans, mountains, rivers, lakes, national forest, etc?

For demand, what is the average income and earning power (education level, etc.) of the residence? Are new jobs being created? At what rate are people moving there and is that persistent and sustainable? Is the employer base diverse or concentrated in one employer or industry? What sort of jobs are there? Blue collar? White collar? Is there a top notch university nearby? Steady, well paid government jobs? How many and what types of small business start ups are there. Are there boarded up and vacant houses? Blight? If so, do they stay boarded up and vacant or get snatched up as quickly as they hit the market, remodeled, and filled?

Other supply and demand metrics to watch the value and trend ... population growth, unemployment rate, vacancy rate, affordability, etc.

I think of things in terms of a "quad chart" ... on one axis you have demand: Low and High. On the other axis you have supply: limited and ample. The quadrants are:

I - Low Demand, Limited Supply & III - High Demand, Ample supply: Prices and rents will tend to keep up with inflation. Mid to low initial cash flow that is steady over time.

II - Low Demand, Ample Supply: Prices and rents will tend to NOT keep up with inflation. High initial cash flow that decreases over time.

IV - High Demand, Limited Supply: Prices and rents will tend to exceed inflation. Low to negative initial cash flow that increases over time.

Billie Miller · Answer

60 years isn't that old for a house if it has been well maintained.

If it's about the same age as all the other houses in the neighborhood, I wouldn't worry about the age so much.

Most neighborhoods don't change overnight either. I think as long as you are keeping up with the pulse of the neighborhood, you can tell if it's still a good investment, 5,10,15 years from now.

Zach Quick · Answer

@Josh Teunissen I think you made a great decision with a house hack, I would just slowly but surely start doing things that can hopefully raise the value of the property as much as you can so that when you decide to move out, you are forced with a good problem of renting and selling or just holding onto it.

Also, remember if you live somewhere 2 of the last 5 years and sell you get preferential tax treatment too.

Dave Carpenter · Answer

Josh, If I were in your neighborhood i'd be thinking about businesses that are accessible. I'm guessing most people don't drive into Milwaukee from Cedar Grove for work. I would guess however that there is some commuting to Port Washington and Sheboygan. Having said that, what businesses will be around and strong for the next 30 years. I quickly think of companies like Ethan Allen, Acuity, Kohler (and all the other businesses that grow out of that). I would think those few companies would likely be around for another 30 years. Next for me would be about the specific neighborhood and proximity to grocery stores and the like. I would agree that the look of the building is not so important provided much of the neighborhood is like that. I have a few duplexes that are about 100 years old. Most of that neighborhood was build 100 years ago, so while they are very old buildings they are totally normal for the area.

I wish you the best!

Zach Quick · Answer

@Josh Teunissen Ideally you are looking at purchasing a property with clear value added opportunities. That way you have built in equity, and if you decide to hold for a long period of time, the property should appreciate hopefully at least the rate of inflation so that initial equity doesn't change + you get loan paydown.

Most advanced investors are looking for an exit strategy within 7 years of initial ownership because your internal rate of return is usually highest then. Holding something ''forever'' usually means you are fixing some things 2-3 times and therefore lowering your rate of return.

Josh Teunissen · Answer

@Aaron Klatt @Zach Quick  @Dave Carpenter  if you read up I tryd to @mention

@Marian Smith thank you! your answer has given me a lot of food for thought. the block my duplex is on is a mix of 2/4 units and condos with single family a short walk down and all around. Land is definatly readily available, at least buildable lots and farm land surrounding. I don't know cost to build, new homes are listed $200k-$300k. I also don't know yet what the supply/demand for our area is, i bought a duplex to live in, close to where i work. But these are all things i need to learn and understand better. My immediate area is fairly well maintained. The 4+unit buildings across the street show more deffered maintenance than the condos right next door.

@Quod L. They even have a Luxemburg festival here!

Quod L. · Answer

I just got an alert and was trying to understand your message thinking you meant Belgium the country.  Nice to know there's also a city called Belgium :)

Josh Teunissen · Answer

@Dave Carpenter I purchased 2 weeks ago in belgium,  I'll update my profile when I have a chance.

Maybe what I'm noticing is age has a close corerlation with "class" in smaller towns like belgium? Or I'm imagining, can't throw that out haha

Belgium for instance,  new build duplexs are renting in the $900+ range, my unit $665, on the old side of town I don't yet know what rent is however the buildings don't look maintained and so on. Also towns like belgium arnt a destination on the map so to say.

Also you wouldn't think it, but I know of quite a few people who drive to the Milwaukee area for work. Not the majority by any means. And most of the people I know are farther north. I think they're crazy.

I agree jobs are fairly stable. 08 was rough up here, my family was affected.

Thanks for responding, I would like to meet local investors like you

Desirable today...but tomorrow?

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