SS220: Comparing Investments: Older Properties vs. Newly Built Properties

SS220: Comparing Investments: Older Properties vs. Newly Built Properties

When real estate investors create their investment criteria, the age of the target properties is one of the most important factors. In this episode, Charles discusses the pros and cons of investing in older and newer properties

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Talking Points:

  • One of real estate investors’ most significant choices is whether to purchase newer or older properties. The terms alone can be very subjective. When I began investing in real estate in Connecticut, I purchased properties built in the early 1900s, which I considered old. When I moved to Florida, people considered properties built in the 1960s old.
  • Like most decisions, there are always pros and cons. I am going to break down what I feel are some of the important points investors should take into consideration when making this decision.
  • Purchase Price: An obvious benefit of older properties is that they are less expensive to purchase than newer properties. It is typical for older properties to be sold for less than replacement value; in other words, you would not be able to build the property you are buying for the price you are paying.
  • Maintenance, Repairs, and Management: The trade-off with paying less initially for an older property is usually higher maintenance and repair costs. Management, in general, becomes more expensive with older properties. Many older properties with deferred maintenance will need to scale back their tenant screening efforts to keep units rented. This translates into higher management costs for tenants breaking leases, evictions, unit make-ready, marketing, and leasing costs. Furthermore, older properties will require a larger reserve budget for maintenance and repairs even if the property is fully rented to great tenants. On the other hand, newer properties are usually built with better materials that won’t need attention for decades. Some examples of problems notorious with older properties would be sewer line issues, electrical issues that require updating to code or for insurance, plumbing that has been patched over the years and never corrected, etc.
  • Appreciation Potential: Location is one of the main driving forces of appreciation. Older properties in gentrifying areas or more desirable central locations might be great investments if the owner is willing to invest capital and time. Compared to newer properties in developing areas where appreciation takes off if there are the same market demand drivers.
  • Insurance and Financing: The older the property, the harder it is to get insurance and/or the more hoops you need to jump through. When I owned properties that were 100+ years old, every year, when lease renewals came through, it usually came with an insurance increase and sometimes a couple of items that needed to be repaired, such as fixing stairs or the sidewalk, etc. As an owner, I was happy they renewed the policy since I had been dropped several times.
    • Financing is usually not that big of an issue with older properties. It is much easier to get financed for a newer property since lenders are not afraid that borrowers will become burdened with repairs and either let the property fall into disrepair, not pay their mortgage, or both. Working with local lenders usually makes financing easier since they understand and believe in the market they lend in.
  • Collections: I spoke with a partner of a large multifamily private equity firm years back, and I remember them saying that as properties age, their collections usually decrease as well. This is a very broad statement, and of course, if we were buying older apartment buildings in some expensive areas of Manhattan or Boston, this might not hold true. Still, their methodology was that when you focus on newer properties, you can attract better credit tenants than older properties. Better tenants typically equate to a more predictable cash flow.
    • As properties age, they will drop classes from A to B and B to C if the property is not maintained or renovated. The whole value-add model is based on renovating C-class properties and bringing them to a B level. However, the location of the property and market are usually the determining factors in determining whether this is feasible.
  • Business Plan: What is your business plan for the property? If you keep an older property for 10+ years, it will require some significant CAPEX. If you do not want to handle this, maybe buying newer properties is a better route. Still, it also might make sense to perform those renovations every 10 years when you refinance to maximize the value of your property.
  • Resale: Who will purchase your property after you complete your business plan? If it is newly built, it might be easier to find a buyer than an older property. Selling an older property in a down market might make selling harder. There is a reason why institutional investors typically focus on purchasing larger and newer apartment buildings: more predictable cash flows and easier to finance and sell.
  • For investors looking for a higher return who are not deterred by the more time-intensive nature of older properties, that might be the best route. On the other hand, for investors looking for a more streamlined real estate investment approach, purchasing a newer property will probably be a better fit for their portfolio. The usual progression I see with real estate investors is that they begin buying newer properties in better locations as they grow.

Transcript:

Charles :
Which is the better investment, the well located older property, or the newer property in the growing part of town. He might be surprised by the answer. So I’ve invested in both older and newer properties, and I want to share what I have learned that might help you become a better real estate investor. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re gonna discuss one of the most significant decisions real estate investors face, whether to invest in older properties or newly built properties. So let’s get started. One of real estate investors’ most important choices is whether to purchase newer or older properties. The terms alone can be very subjective. When I began investing in real estate in Connecticut, I purchased properties built in the early 19 hundreds, which I considered old when I moved to Florida. People considered properties built in the 1960s old, and like most decisions, there’s always pros and cons.

Charles :
And I’m gonna break down what I feel are some of the most important points that investors should take into consideration when making this decision. So first off, it’s the purchase price, which is obvious. It’s what most people probably see first, and it’s this obvious benefit of older properties, is that there they’re less expensive than new ones, and it’s typical for older properties to be sold for less than replacement value. In other words, you would not be able to build that property you are buying for the price you are paying. Next is maintenance or repairs and management. And the trade-off with paying less initially for an older property is usually higher maintenance and repair costs. Management in general becomes more expensive with older properties as well. Many older properties with deferred maintenance will need to scale back their tenant screening efforts to keep units rented. This translates into higher management costs for tenants breaking leases.

Charles :
Evictions unit make ready marketing and leasing costs. Furthermore, older properties will require larger reserve budget for maintenance and repairs, even if the property is fully rented to great tenants. On the other hand, newer properties are usually built with better materials that won’t need attention for decades. Now, some examples of problems notorious with older properties would be sewer line issues, electrical issues that require updating to code or for instance, plumbing that has been patched over the years and never really correct. The next part is appreciation potential. Now, location is one of the main driving forces of appreciation. Older properties in gentrifying areas are more desirable. Central locations might be great investments if the owner is willing to invest capital and time compared to newer properties in developing areas where appreciation takes off if there are the same market demand drivers. Next is insurance and financing.

Charles :
Now, the older the property, the harder it is to get insured and or the more hoops you need to jump through. Now, when I own properties that were a hundred plus years old every year when lease renewals came through, it usually came with an insurance increase and sometimes a couple of items that need to be repaired, such as fixing stairs or the sidewalk, et cetera. And as an owner, I was happy they renewed it. I and I just had to make these changes. But I also was dropped several times. So every time the renewal came by, it was kind of a relief, but sometimes it came with a couple caveats, which you had to re kind of re repair or refix, whatever it might be before they would actually do it. You might get those like a couple months before the renewal date.

Charles :
Now financing is usually not that big of an an issue with older properties, but it is much easier to get financing for doer property. Since lenders are not afraid that borrows will become burdened with repairs and either let the property fall into disrepair or not pay their mortgage or both. And working with local lenders usually makes financing easier since they understand and they believe in the market that they’re lending in, which is where you’re buying and investing into. Next is collections. And I spoke with a partner of a large multifamily private equity firm years back, and I remember them saying that as properties age, their collections usually decrease as well. And this is a very broad statement. And of course, if we’re buying older apartment buildings in some expensive areas of Manhattan or Boston, this might not hold true still. The methodology was that when you focus on newer properties, you can attract better credit tenants than older properties.

Charles :
And better tenants typically equate to a more predictable cash flow. Now, as properties age, they will usually drop in class from A to b B2C, and the property is not maintained or renovated, it’ll just continue. And the whole value add model is based on renovating c class properties and bringing them to say a B level. However, the location of property and the market are usually the determining factors in determining whether this is actually even a feasible. Now, next is the business plan. In general, what is your business plan for the property? If you keep an older property for 10 plus years, it’ll require some significant CapEx, capital expenditures. If you do not want to handle this, maybe buying newer properties is a better route to take. Still, it is also in light. Makes sense to perform those renovations every 10 years when you refinance to maximize the value of your property.

Charles :
So typically when you refinance out, if you’re doing it say five, 10 years, definitely 10 years, you’re gonna have built some equity in the property and you can take some of that out. You can reinvest into your property to repair anything needs to be done, update anything that’s gonna increase rent. And that’s really the whole, the great thing about commercial mortgage is where you’re gonna have that balloon and you can kind of refinance everything, pull some cash out, make the property better, and go on. Next part here is resale. So who will purchase a property after you complete your business plan? If it is a newly built, it might be easier to find a buyer than an older property. And selling an older property in a market and especially a down market might make selling harder. There’s a reason why institutional investors typically focus on purchasing larger and newer apartment buildings, more predictable cash flows and easier to finance and sell.

Charles :
Now for investors looking for a higher return who are not deterred by the more time intensive nature of older properties, that might be the best route. On the other hand, for investors looking for more streamlined real estate investment approach, purchasing a newer property will probably be a better fit for their portfolio. The usual progression I see with real estate investors is that they begin buying newer properties and better locations as they grow. And that’s exactly what I did. I started with older properties and little by little I’ve grown to just buying properties as you know, 1980s, 1990s and newer now. So I hope you enjoyed. Please remember to rate, review, subscribe some, make comments and potential show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

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