IMO, that only works where location is not an issue. In Chicago, I just rented an apartment for $1050/M. If you took that same building, and put it in Lincoln Park, the rent would be $1750 for the same apartment. If you took the building and put it in Ukranian Village, the same apartment would go for $850.Quote from BA_Trader:
For starters I agree with IndexTrader.
I think one of the smartest things I've read about RE investing
is to figure out replacement cost (cost to simply rebuild the
building minus some depreciation). A builder or developer can
do this for you.
Once you know this number you can figure out how much the
price is inflated due to the hot RE market.
However if you can get great financing (think leveraged with
low interest) the ROI might not be half bad. Remember -- over
the years rents go up on average but the mortgage doesn't.
As long as your rental income exceeds mortgage you are cool
(unless we have disinflation or deflation -- then you go Ch 11)
JT
Only insurance companies, and probably a bank, value a piece of property this way.
We bought a six flat in an area where there was little developement being done. We paid a premium for the space because of the _location_. We turned it condo and made a VERY nice profit. Many looked at the property and passed on it. After we did the conversion and people saw the succees, the hyenas came in and scrounged up every building in sight for even a more premium than we payed( comparitively.) If we had had the money, we would have bought everything in sight ourselves.
Two doors down from my current single family, the house was on the market for $425,000. It was a perfectly good house, but more importantly, it is in one of the hostest locations in Chicago and is on a Chicago double lot, 50 x 150. Now, lots in this area go for about $300,000. Well these people bought it, and two days after they closed there was a wrecking crew in. Essentially, they valued the lot at $425,000, a huge premium over anything else in the area. They were right. They build a gorgeous brand new home there, and could easily sell it for $350,000 profit. They are living in it for two years so they can take the tax break when they sell it.
Real Estate, like hitting in baseball, is all about eye and attracting would be buyers or renters.
If you have location, you have everything in RealEstate. I am more and more convinced that the real value of Real Estate is the Land it is on and the rest, unless it is relatively new, or old gorgeous and a landmark, is nearly worthless predictor of value over time.
nitro