All Forum Posts by: Leah M.

I agree that 15% is not realistic but it is also likely more than 20 years until 50k needs to be invested in capital improvements (potentially wiping out the initial equity).  Many parts of the home can last for a very long time.    My point is that numbers need to be plugged in, a blanket statement can't be made. I didn't necessarily plug in realistic numbers. I also disagree that only land can appreciate in value.  This is not really correct.  A home can go up in value even as its parts are becoming older. Someone can be willing to pay more for something even as its parts are becoming older.  So the 50K home can appreciate in value to 100k even if the full replacement cost were 150k, and the land therefore having no value, (as long as some parts of the home are still good).  Generally speaking, I would also shy away from a 50K home, without really understanding the area for the reasons you cited.  I also agree that all real estate involves speculating into the future, so this dichotomy that is usually presented where high cash flow is "real" and appreciation is speculative is not really correct.  Everything is speculative. 

Except that it is possible for a 50k home to beat a high land value location, even though I actually agree with you that there is probably a big 0 somewhere at the end of long cash flow stream due to the low or nonexistent land value. For example, say a home in California sells for 500k and in 20 years is worth 750k due to appreciation, but cash flowed at 3% per year. That works out to about 5.5% per year all cash (my math I know is somewhat off since i'm not really compounding, I am doing this off the cuff.) On the other hand, if you buy 10 50K homes at a 15% cap rate, and in year 20 they are effectively worth 0 (say they are fully depreciated and it costs 50k to upgrade), you still made a ~10% per year return (300% in cash flow minus 100% of equity invested). So it all boils down to the numbers: i.e. what is the rate of appreciation, how quickly will the 50k property depreciate, what is the cap rate etc. I do agree with you that people don't think like this.

I also think that related to this, cheap areas will experience a long term rise in labor costs due to out migration, further supporting the 0 at the end. Why should someone do work on the cheap when they can move to a part of country where labor can charge so dramatically more. I understand that the cost of living is higher if they move, but still the difference in labor costs seems so enormous that it still would pay to move and do for example a long commute. My two cents.

Except that it is possible for a 50k home to beat a high land value location, even though I actually agree with you that there is probably a big 0 somewhere at the end of long cash flow stream due to the low or nonexistent land value. For example, say a home in California sells for 500k and in 20 years is worth 750k due to appreciation, but cash flowed at 3% per year. That works out to about 5.5% per year all cash (my math I know is somewhat off since i'm not really compounding, I am doing this off the cuff.) On the other hand, if you buy 10 50K homes at a 15% cap rate, and in year 20 they are effectively worth 0 (say they are fully depreciated and it costs 50k to upgrade), you still made a ~10% per year return (300% in cash flow minus 100% of equity invested). So it all boils down to the numbers: i.e. what is the rate of appreciation, how quickly will the 50k property depreciate, what is the cap rate etc. I do agree with you that people don't think like this.

I also think that related to this and strengthening your point actually, cheap areas will experience a long term rise in labor costs due to out migration, further supporting the 0 at the end. Why should someone do work on the cheap when they can move to a part of country where labor can charge so dramatically more. I understand that the cost of living is higher if they move, but still the difference in labor costs seems so enormous that it still would pay to move and do for example a major commute. My two cents.

I was thinking Brighton.  If a buildings condo rules allow renting, is there a risk especially in a small building of the owners voting to change the rules after the purchase?

Hi All, 

I recently moved to the Boston Area from NYC and would like to buy a condo unit as an investment here.  I wanted to get an idea about some basics. In NYC condos can basically always be rented out (as opposed to coops), but the condo board has to approve the tenant.  How do things work here? Are there building that don't allow owners to lease or have other restrictions? Can the rules be changed at the whim of the other owners? Does the condo board need to approve each tenant? Thanks!