Can I create value in real estate?

August 26, 2010 12:39 PM

Can I create value in real estate?

Background: I've been thinking about buying a condo in the Los Angeles area, but I'm put off by HOA fees and the feeling that I'd be investing a large sum of money an something unremarkable.

So I've been considering instead buying a lot in a relatively underdeveloped area (Altadena, say) and building a small >1000 sq. ft. house or prefab home. Is this insane? Would I be creating value by putting together sweat equity + a nice piece of land + a house + good landscaping, or would I come out net negative? Thoughts?

posted by symbebekos to home & garden (10 answers total)

Unremarkable isn't a bad thing in real estate. Most people live in unremarkable houses or apartments. And though there are exceptions, prefab housing is almost be definition non-unique, since they make hundreds or thousands of them.

Whether or not you can make money with your sweat equity depends, in addition to market factors and location, on your skill. Do you have experience with building houses or working as a general contractor? Think carefully: if you've watched Flip This House-type shows, where they are doing much smaller projects than you're contemplating, you'll see that many many people think construction is much easier and cheaper than it actually is.
posted by gabrielsamoza at 12:45 PM on August 26, 2010

It depends entirely on the price of the land, how much money you spend on development and improvements (including, of course, permits, etc., which cost more than anyone expects and take longer than anyone realizes), how long you hold onto it before trying to sell, and what the market happens to have done between the time you purchase the property and the time when you decide to sell.

I live not too far away from the area you're talking about. As an avid listener of Planet Money who has been very closely watching real estate in Southern California for the last 6 years, I think it is extraordinarily foolish to buy real property as an investment in Southern California right now. But I could be wrong, I suppose.

Land in the L.A. area is still overpriced. Houses in the L.A. area are still overpriced. The expenses involved in building a residential structure in the L.A. area are onerous and impossible to accurately estimate.

My opinion (this is not financial advice, legal advice, or anything like that) is that building a cheap prefab home on land in Altadena right now is no more insane than buying a condo in L.A. right now. But that's only because both ideas are completely insane.
posted by The World Famous at 12:49 PM on August 26, 2010

If you want to make any investment in real estate right now, there's only one way to do it: go very very very long. By that, I mean focus on getting a place that makes you happy, that you can afford, and that you intend to stay in until it is paid off.

The benefit to a home buyer right now is lower prices than we had in the last seven years, but the downside is that you'll likely lose more in the next few years. If you really want to avoid going under water, do this:

• Find a location you really want to live in, long term;
• Start looking at houses and figure out what you want;
• Become an expert on housing price trends for that type of purchase in your selected area;
• Have your money and paperwork ready to go, for the day you realize that prices in that area are trending back up and you feel confident in making a purchase.

Of course, you may be waiting years, or more than a decade. Still, if you don't want to go under water, that's what you'll have to do. Meanwhile, if you just want to find a place you can afford and don't need to sell the house for 30 years, do those same steps but buy the house once you've found one you love in the location you want, and don't look at the value of the house for a decade (also, put down as little money as you can in case you need to walk away for some reason.)
posted by davejay at 1:05 PM on August 26, 2010 [1 favorite]

Yeah, real estate as an investment is in armageddon mode right now. Buy a house to live in, not to rake in cash from. There is every chance that you won't make a dime, even if you live in it for 20-30 years. So, I'd find a nice area, and check out the foreclosed houses that aren't gutted wrecks, and live there.
posted by Slap*Happy at 1:36 PM on August 26, 2010

Are the lots you're looking at in Altadena on a hillside? The one thing I've noticed about the really cheap lots in and around LA are that you need to spend 100-200k on pile foundations or retaining walls to make them buildable. Anything on flat land already has that cost built into it.
posted by hwyengr at 1:52 PM on August 26, 2010

Everybody, thanks for the great responses so far. I should clarify a few points:

Generally, I'm not thinking about this as AT ALL as get-rich-quick idea, to build a house and flip it, nor do I have special homebuilding skills, although I'm sure I could do some amount of work myself, at least manual labor. I'm just trying to figure out if there would be more long-term upside than, say, buying a conventional condo.

gabrielsamoza: Indeed, whatever I put up would itself be unremarkable; it would be terrible to build a house in the shape of an elephant or something. I guess I meant the allure of more space/land for the money vs. a condo.

The World Famous: I have to live in LA, so if it were you you'd continue to rent?
posted by symbebekos at 1:58 PM on August 26, 2010

hwyengr: I'm not looking at any lots specifically, but I'm aware of the hillside thing - you get this in Eagle Rock and other places as well. The quality of lots and zoning, power, sewage issues complicate the issue further, but I'm kind of bracketing that for the moment.
posted by symbebekos at 2:00 PM on August 26, 2010

The World Famous: I have to live in LA, so if it were you you'd continue to rent?

I live in L.A. and I continue to rent. I am not aware of any legitimate reason to buy a primary residence in L.A. any time in the next 4 or 5 years. I like my house and neighborhood, my kids are in great schools, and I pay a lot less than what it would cost to buy a house that would be losing equity by the month. And I have no reason to believe that housing values (i.e. sale prices adjusted for inflation) will increase in my area at all in the next several years.

I'd be happy to tell you more specifics about my own analysis of my situation via MeFiMail.
posted by The World Famous at 2:22 PM on August 26, 2010

I've worked in real estate in LA for a few years now and here are my rough thoughts beyond the scope of your questions. I'm not rich off it yet so YMMV, grains of salt, etc.:

1) Buying a place to live in is financially not worth it. There may be emotional reasons, like the need to buy a $100K car, but financially it doesn't make sense until it is not a real financial burden to you. In the last crash, housing prices took 10 years to recover to pre-crash pricing. In addition, people psychologically don't like keeping their house levered, which is actually the strategy that usually makes the most financial sense.

2) Condos in particular seem to be geared towards suckers. Almost every developer of condos I've met thinks of their buyers as idiots. There are some exceptions with the depressed housing prices, but in general it doesn't seem to be worth it with HOA fees thrown in. In addition, HOAs can be badly managed and screw up their own cash flow projections forcing you to throw in additional cash down the line.

3) Residential/multi-family commercial real estate is probably a safe bet. Dups, trips, quads etc. can be a good way to start. You can leverage that up later on easier than you can leverage a house in many cases. You can get good rates right now on buildings under 5 units.

4) That said, these smaller buildings can be a hassle to maintain. Plumbing, repairs, etc. are things you're likely going to have to manage on your own since it will be too costly to hire a management company.

5) I'm telling you this as a prelude to this: development is crazy and crazy hard. I've known very sophisticated investors who've sworn off development because of the hassle and because I know developers who love it, but have gone through swings where they've had to write off millions of dollars on a ganked project.

6) Development seems to require a real talent for project management, dealing with lots of different kinds of people, including thieves, cheats, charlatans and scoundrels. Plus bureaucracy, red tape, cost overruns, whatever bad thing you want to throw into the mix. It will happen. It's one of those rare professions that require a sort of innate skill and psychological temperament that cannot be learned. But if you've got it, you can make some serious bank.

7) Demographics. It's really a HUGE factor in development and real estate in general and something that people ignore because they just want to build something they think is beautiful. I don't know much about Altadena (though it seems cool), but understand the city and the neighborhood well. Are more young people moving into it? How has it changed in the last ten years? How have tax revenues been? The number of small business licences applied for? Are there enough hipsters who want small cute prefab houses? Or is it mostly *redacted* McMansion monstrosities with a fountain or three outside? Study all these factors.

My personal gut feeling is that I'd consider some more options, namely trying to buy a dup or a trip and learning a little about managing real estate and building up a vendor list over the years and then leveraging that into something bigger. Maybe even go in with someone on the deal and continue to rent. If the choices were only the two listed above, I'd go for the development, but I like risk and don't mind betting the farm at this point in my life. I may even consider buying a bigger parcel and putting in two or three prefabs and marketing it as a sort of hipster commune getaway thing.

Quick thoughts that I'm not as confident about: Land is a fixed quantity. Contrary to some posts above, land in LA is not that overpriced -- it's the houses that are overpriced. If you just looked at every unbuilt parcel between the 10, 405, 110, and 101 I would guess (based on some rough calculations I did) that the land is overall a good buy. But I'm assuming that based on some rough demographic assumptions (more illegal immigration, birth rates among Latinos, proposed rail/light rail buildout, etc.) that land in the metro LA area is never going to be found wanting. Of course, there's other data that shows that LA has a net population loss. At the end of the day, do the research but it's not going to give you a clear answer.
posted by AmitinLA at 3:39 PM on August 26, 2010 [3 favorites]

The sentence should read: "I don't know much about Altadena (though it seems cool), but you should understand the city and the neighborhood well."

Man, I wish there was a fifteen-minute edit feature.
posted by AmitinLA at 3:40 PM on August 26, 2010