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1
MarkInSF
2010 Apr 19, 3:32pm
Right now values are down 40% in many first-tier markets....you can buy a quality property for 30% less than it would cost to build
Uh, what first-tier market is this?
2
ordertaker
2010 Apr 20, 2:31am
I paid about 30% less than building cost on a home in FL that I'm using as a rental unit and that definitely factored into my decision to buy. Prices have slipped a little since I bought in July 2009, but not enough to cry about. My interest rate is 5.75 for the first loan and 3.75 for the second as I used a HELOC on my primary residence to essentially do 100% financing. The rent covers all the costs.
Pay attention to replacement cost: It's a bad idea to focus solely on how much rent a property produces. Right now values are down 40% in many first-tier markets, but some of the rent-obsessed argue that property is still a lousy investment because rents are low. They're forgetting to consider replacement cost.
If you can buy a quality property for 30% less than it would cost to build, it's a very good buy signal. Rents go up and down. Construction costs will probably never go down significantly in our lifetimes, given that commodities and American labor continue to get more expensive.
Since everyone would rather buy an existing building than build one for the same price, nothing is getting built until values exceed replacement costs. As we learned in microeconomics, rents (prices) will quickly rise if properties (supplies) stay the same, while demand increases. I cannot tell you exactly when demand will pick up, but it always does in prime locations.