Functional obsolescence may be one of the most misunderstood factors involved in real estate investing. Have you had experience with it? I sure have.
Transcript: Hi this is Jeff Brown the “BawldGuy”. Today, we’re going to talk about what’s known as Functional Obsolescence. In a nutshell, what that is is a loss or reduction of a property’s desirability or usefulness. It’s a pretty practical thing. For instance, you might have a design problem. You might have a kitchen that is just a 1950s kitchen and never had a dishwasher; if you put one in, you have to take it down to the studs to figure out where to put it. It doesn’t have the plumbing for it so you’d have to mess with that. By the time you were done, there’d be no room for one person. I’ve seen those before. We call those “I Love Lucy” kitchens. You have to be in love for two people to be there. Then you have the floor plan problem. You have those floor plans from 20, 30, 40 years ago and longer where, for instance, I’ve even seen bedrooms where, to get to one bedroom, you have to go through another. That might have worked back then, but it’s a non-starter now for most modern renters. They just don’t want to be in that situation. Typically, functional obsolescence of that nature are found in areas you probably don’t want to buy anyway. Now, when you have a newer competition, you might buy a property that’s 25 years old. There’s nothing inherently wrong with older properties. The thing is, if your property is in great condition, but it’s got an old dishwasher you can’t improve it really because the plumbing is going to be required to be changed. You’ve got three bedrooms and a bath and a half. That’s obsolescence these days because even the extra bath these days has a shower stall in it. A half bath doesn’t. Then you go to talking about “Man, I’ve got a one-car garage,” and sometimes, people don’t even have a garage. These days, that just doesn’t cut it. You’ve got to almost always have a two-car garage. It just doesn’t make sense otherwise. How many families do you know these days, throughout the low and throughout the high, that don’t have both people working and that they both have cars? They need a place to park them and they don’t want to park them on the street. Functional obsolescence. Now, what’s the difference when you have functional obsolescence? You get less cut of the high quality tenant pie because they’re going to the competition. Right away, you begin cutting into tenant quality. As we’ve spoken about many times earlier, that’s not path you want to go down. That never comes out the way you want to. Remember, functional obsolescence can often be a real profit motive for flippers, but for long term buy and hold, it’s just not the way to go. This is Jeff Brown, the BawldGuy. I’ll see you next time. Catch you later.