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.
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.
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.