… The Trend is Your Friend
While there are a number of useful inputs to the value of a certain property, an interesting phenomena of use to rehabbers is the nature of buyers and sellers. One useful input comes from the field of economics in the form of what is called a population pyramid, this one from the Census Bureau. Generally, it is more like a triangle with a lot of young people representing the base, and then fewer people surviving into later years. It’s also pretty common to have males and females separated out, as it is in this case. But we don’t have a regular triangle, in fact we have 2 lumps: the top one is the baby boomers, just starting their retirement years. As they age a bit more, they are likely sellers of the homes they are living in, as they downsize for whatever reason. The other lump is the millennials. Yes, they are buying houses and Realtor.com points out that more than 50% of the mortgage originations now come from millennials, while Boomers are now less than 15% . This gap between buyers and sellers is also reflected in the average age of US housing stock, which now sits at older than 34 years . So, we have buyers and sellers, what is the role of the rehabber? As we consider specifics of a property, it becomes very obvious.
First off: this means that the houses are out of date in terms of style. Some of this will go away in the form of furniture that is removed before closing. But permanent elements such as iron railings, chalk walls, dark cabinets, ceiling fans in every room, textured ceilings, pine, tile counters, dark rooms, etc. were once in style but are no more. As a rehabber, you will end up with much of this in your dumpster at the end of demo day. But these homes are also out of date in the ways the home is used. Outdated and wornout items like water heaters and HVAC, roofs, plumbing and security, can make the home significantly less comfortable and also add to the cost of ownership.
What doesn’t change about the homes is their locations. While new builds are being built in outlying areas, older homes remain nearer to work, shopping and developed entertainment centers. And many buyers are finding the commutes just too long to buy in an outlying area and the difference between a new build and a rehabbed home getting smaller and smaller, buying a ‘new’ older home in a closer area just marks sense. Younger demographics like millennials provide an essential need for rehabbers to update and upgrade homes that are old and outdated yet located in desirable areas.
by David Neilson, Boomerang Capital Partners