Every week I speak to some pretty smart cookies. They’ve invested in several properties in their hometown. The thing is, I spend somewhere around 40% of my time tellin’ investors they’re doin’ just fine, don’t change a thing. Or maybe change a few things and you’re flyin’ high. They’re usually surprised, but happy.
There are three basic factors to consider when deciding to sell/trade or keep a local income property.
1. The true quality of it’s location.
2. The true quality of it’s construction.
3. The current age of the property.
Location quality
In my experience, this often morphs into too much of a subjective choice. A little over eight years ago when I decided San Diego income properties were not measuring up, it became imperative to establish a universally objective way to ‘appraise’ location quality. This ‘rule’ had to effectively and accurately assign the level of quality to any particular property in any state/county in the country.
The BawldGuy Mom Rule was born.
Mom turns 81 this spring. If I wouldn’t put her into a property I’m considering for a client, the property is no longer considered. No exceptions, no excuses — next property please. Before the rule was made policy, it was a coin toss as to what I’d find when a team member in another state would tell me it was ‘blue chip’. Or, a ‘slam dunk’ location. Or my favorite, “Jeff, it’s a no-brainer. You don’t even need to fly over to see it Trust me.”
Now? They know what’s comin’. They think twice before tellin’ me they’d put my Mom into this golden location. Funny how puttin’ a face on a policy, along with the the concept of ‘Mom’, changes everything in an instant. 
So, back to your local portfolio.
Would you put your mom or grandma into your income properties to live alone? If the answer is an instantaneous and confident ‘yes’, you’re one up in your decision making process.
Construction quality
Let’s not play games with this one, OK? Most of us know quality vs crappola when it comes to construction. Is the foundation solid? How many corners were obviously cut during construction? Remember, you’re not lookin’ at the quality for now. You’re lookin’ at it for 15-30 years down the road. Is the quality of a nature that you wouldn’t mind owning it and possibly managing it in 2025? Ah, that puts a different spin on it, right? Not being straight with yourself on this topic will almost surely bite you in the butt later on. You’ve been warned.
The current age of the property.
The vast majority who call/write me say their properties were built in the 1980s or earlier. If you’re already 40ish, planning to retire at around 60, think. Those properties that’re 35 years old today, are gonna be over half a century old at retirement. Think operating expenses. They’re gonna be measurably more than they are today — duh. That directly impacts your bottom line retirement cash flow negatively. The older the units, the more likely it is you’re dealing with functional obsolescence. It could be floor plan, basic design, unattractive kitchen setup, and that’s just three simple examples. It directly affects both the number and quality of tenants you’ll be attracting.
Expanding operating expenses combined with a decrease in the size of the tenant pie, not to mention tenant quality, ain’t something you wanna generate on purpose. Yet that’s virtually guaranteed to happen in most cases. It’s a downward spiral I’ve not seen reversed in my decades of experience.
A final word
When appraising quality of location, here’s something to consider. Average to below average quality locations tend to go downhill over the long haul. Not always by any means, but more likely than not. Take a look at what were perceived as ‘average’ areas in your town when you were a kid. How are they perceived now? I know where I lived during my last couple years of high school was considered fairly average in the late 1960s. Now? When you say that city’s name, foreheads furrow, and frowns appear.
Neighborhoods that were universally thought of as ‘Average +’ are still considered as at least average if not the same as 30 years ago. If they were considered ‘blue chip’, they still are. Are there exceptions? You bet. But in my experience this has tended to hold true everywhere I’ve been.
What speeds the downturn of an area is when poor quality construction begins to ‘out’ itself. Word gets around, and before ya know it, it’s become common knowledge around the community at large. For the record, that’s never a good thing.
Add functional obsolescence to the equation? Admit defeat and get outa there.
Take a look at your local real estate investments with these three factors in mind. Be brutally honest in your analysis and conclusions. You’ll have a much better idea of what you should keep and what should be sold or exchanged.
Here’s the next thing you might wanna do: Call me. I need a fix — every day. 619 889-7100 will find me. Or, you can opt to click the Contact BawldGuy button up top. Either way, we’ll figure things out together. Have a good one.
Building my house was a HUGE eye-opener when it came to construction quality. People need to realize that “expensive” doesn’t mean “good.” I’ve seen houses that were selling for over a million bucks (would be worth $5+ million in San Diego) and the quality was just hideous. My dad just worked on a house on Coronado that was absolutely terrible quality. The original contractor had no idea how to build a house, even though he was charging $8k/mo. to manage the job, plus $45/hr for his own work. Here’s a few things I can remember off the top of my head when I was going through job sites on a daily basis back in ’05/’06:
I’ve seen a slab that was being poured over hundreds (thousands?) of weeds. I guess they decided it wasn’t worth the time to clear the lot. Their footings were nowhere close to what they should have been — it looked like someone took a shovel to dig out footings. They ranged from about 6″ to 15″ deep, but not in sections — just up and down, up and down all throughout the footings. I saw that one afternoon and they poured the next morning, so I am certain they didn’t fix the footings.
I’ve seen huge holes in the foundation where they had to jackhammer out the concrete slab because they missed the plumbing by about 6 FEET — that made for a good 10′ hole in the kitchen. Oops.
I’ve seen where the roofers were cutting the tile directly on the roof and cut right through the paper and OSB (could see daylight right through the roof from the attic). They just covered it up with tile. Who cares that we get massive downpours with 40+ MPH winds here? A little water never hurt insulation or drywall, right?
I’ve seen where they used the good foam insulation, but the guys didn’t have the right mix, so the insulation shrank and left about an inch gap around each stud. So much for filling in all the nooks and crannies with that foam!
When the building inspector came by my house during the frame stage, she looked at our truss clips and asked “wow, where did you find these?” Uh, Home Depot. Turns out most framers around here just toenail the trusses to the top plate. That makes for some nice cracked drywall on ceilings. I wondered why it was cracked in the townhouse I used to rent. Turns out that’s why. She said she was going to meet with the other inspectors and tell them they should start requiring those clips. Shouldn’t they already be required since trusses shouldn’t be nailed to the walls?! Hence having TRUSS CLIPS. Oh well, they have the attitude of “that’s the way we’ve always done it, so that’s the way we’ll keep doing it.” Well, at least until they get sued…
Great stuff, Travis. I’ve seen that and more. it’s at times been, literally, criminal. Quality matters, especially when we’re talkin’ so many years down the road. Thanks
I can be a testament to old vs new if you want to compare my older apartment complex statement (pages of expenses) vs the newer houses.
I agree that newer nice construction and newer floor plans attract better tenants. You get more rent and the tenants makes more money so they can afford a housekeeper. I love tenants with housekeepers. When the tennant moves out, you have no turnover cleaning costs and no downtime.
We send a carpet cleaning person and housekeeper as a gift for lease renewal. I’ve noticed that the even in the older properties, the tenants keep things up better with a little help once a year.
Jeff, is right… don’t buy where your Mama would not be safe at night. . Avoid this scenario at all costs. I’ve owned in bad areas and the weekly painting of grafitti wears you down until own day, you just can’t get out of bed and paint it out one more time. So you don’t, and then its downhill from there.
If it is an older property and you MUST have it because of the charm, make sure it has been kept up and modernized. Once in a while, there will be an older property that has been designed by an architect and built by his buddy the perfectionist contractor. Then there is the charming 1800′s house in New England that has been completely restored, but my bet is that neither of these would cash flow.
Question: when in San Diego, where do you find new construction that cash flows or do you build your own?
“Question: when in San Diego, where do you find new construction that cash flows or do you build your own?”
Hey Cher — You can’t find new construction multi-family as a rule. Builders don’t build them cuz the same lot(s) is more valuable with new homes.
I still say you should manage property for people. You’re a natural.
awww shucks, Thanks for the compliment.
Glad to see you are where you shine…building portfolios for others, shoving those deals through and writing down wisdom.
I’m one that knows…Jeff hangs in there and if the deal can be done, he is like a dog with a bone and will hang in there until the end. He”s one persistent guy!!
I know others who just give up if a deal gets hard. Why open escrow if you’re not going to do all you can to finish?
. I learned another level of persistance from Jeff. Many times I wanted to bail out because I was so upset with the bank, the sellers, the inspectors, etc etc. Jeff would call me and remind me of the prize. This man is the supreme “hand holder” in a deal.
Allot of ups and downs over the years, but now life is good and would not have been except for persistence. And it helps to have good friends and an understanding spouse.
Hang in there everyone who is ready to give up.