Appreciation vs Depreciation
People often talk about houses appreciating, but what if I told you that this is actually a myth? What actually appreciates is the land that your house sits on.
The “sticks and bricks” and all the building components that make up your house itself actually start losing value as soon as they leave the supplier, just like any other items you buy new at the store and bring home to use.
The appreciation that you see in your home’s value over the years includes the appreciation in land value plus the affect of inflation on replacement value (which includes both labor and materials).
In other words, the cost to build a new house keeps going up, so an older house gets a bump from inflation.
Still, This value is actually reduced by the depreciation of the existing structure. As the existing structure loses value over the years, at some point, the value is equal to the land value.
When you are close to this point, unless you are talking about major renovations, any money that you put into fixing it up is basically down the drain because it will still only be worth land value.
The repairs / renovations will just not be enough for a buyer to think it’s in move in condition, so it will still only appeal to a buyer who wants to tear it down.
That’s why you always want to look at any major renovation project very carefully and extrapolate the future value of your home.
In other words:
1. Value today?
(Estimated renovation cost)
2. Value after planned renovation?
3. Value estimated upon future sale?
For #3 you’ll need to estimate how long you’ll probably stay in your home.
What we see is that when we renovate, the finishes seem new to a buyer for the first few years. After a few years, finishes begin to seem dated and negatively affect the price.
If you own a property that is in need of some major work, you’ll want to get a professional to help you to evaluate your options.
I find that often, people are surprised when they look at the numbers.
It can make a substantial difference to your bottom line.
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Of course It’s going to take some effort on your part and it’s definitely not for everybody, but if you enjoy creating new things in your life and building wealth in the process, it will be a lot of fun for you.
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Passive Investing in New Construction Projects
There is a lot of pent up demand for new construction condos & rental properties in some of Chicago’s best neighborhoods.
That’s why LD2 is focused on building great new multi-family projects in the Chicago market.
Development projects require a lot of expertise and quite a bit of capital.
That’s why, investing as a passive investor is the best way for most busy people to put their equity to work and build wealth close to home.
By investing passively, you’ll have the benefit of aligning your interests with an experienced team.
Your entire project is managed from start to finish with the goal of maximizing your returns.
At LD2 we build futures; one project at a time!
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LTC & LTV in Multi-Family – Your Lender’s Perspective
Regardless of whether you are doing new multi-family development, or Value-Add rehab projects, Understanding how your lender looks at Loan to Cost and Loan to Value ratios is critical to understanding and mitigating your risks in any multi-family deal that involves construction.
Having served on the Board of Directors and loan committee for a Chicago community bank that specialized in commercial real estate and construction lending from 2005 through 2010, I not only experienced the 2008 “Great Recession” first hand in my own development business, but had extensive experiencing helping our borrowers work their deals out.
Many of the bigger developers that came through that time in the market have now become very successful and are semi-retired. A lot of the smaller developers (and lenders) are not around today.
The vast majority of people doing these deals today did not have the benefit of experiencing the drop in values that came with the Great Recession.
This video can help you to understand. It’s all about values and capitalization!
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Multi-Family Risk Factors – Your Lender’s Perspective
Most of us would like to avoid Risk, but lenders and professional investors, know that understanding risk is actually their path to long term success.
It’s important for all multi-family investors to understand the lender’s perspective because when you have a commercial mortgage / construction loan, your lender ultimately has a great deal of control.
Multi-family income property is an great way to build wealth and right now, it’s the perfect way to hedge against inflation, but most of us do understand that you just you don’t make money without risk, right?
Now if you’ve been out looking for multi-family investment properties to buy, you’ve probably found that any property in good condition, in a good area with good cash flow will cost so much that you won’t be able to make very much money on it.
If you want higher returns (which most investors do), you need to find properties that are underperforming and can be renovated and re-positioned to increase their income, these are what they call “Value Add” deals.
Likewise, Developing new construction multi-family is like the ultimate value-add deal because it is 100% new. These properties attract the best tenants and generally get the highest rents for the area. When executed properly, they can also create the highest returns.
Having been on the Board of Directors and the loan committee for a Chicago community bank specialized in real estate lending from 2005 – 2010, I want to talk about the risk factors involved in multi-family deals that involve new construction and/or renovation.
The fact is that, assuming the principals know what they are doing, the vast majority of Value Add or New Construction deals are going to be quite successful and profitable, but once in a while, they can and will run into troubles.
If you do 10 deals and 7 are very profitable, you may have one or two that are only so so and you may also have one or two that get caught in a bad market period.
To mitigate risk, we want to consider what can happen if things don’t go according to the original plan and have some contingency plans in place.
Once they are completed, leased up and stabilized, these projects will have all the same risk factors as any other stabilized properties you might purchase. Less actually because they will be new or newly renovated.
Of course the income numbers projected in their loan application rely on renovation / construction being completed before they can be leased at these higher rents.
This means that they will be subject to additional construction related risk factors. These risks are what we discuss here and in the next video where I’ll discuss why you need to understand the lender’s perspective on Loan to Cost and Loan to Value ratios and how they affect you.
✅ Watch NEXT VIDEO – Loan to Cost & Loan to Value: https://youtu.be/lap9Jy0-KCY
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