Is an Old Home Worth the Investment?

Prof Dr Ritesh Srivastava

While buyers are usually drawn to recently built homes, there is a group of home buyers who
turn their attention to America’s older houses. Older homes attract the attention of history
aficionados and people who admire the unique architecture of “pre-war” buildings, giving older
homes an important market of their own. “Old homes” refer to homes that were constructed from
1900-1960. Since these homes lack modern amenities, they have old heating and electrical
systems and may have issues like lead paint, and termites. So it’s important you take precautions
when purchasing an older home.
It’s all about the Appraisal
When buying an old home, an official appraisal is still necessary to formally notify the bank how
much money is needed for the loan. Appraisals for older homes can sometimes have more
surprise than estimates for newer constructions.It’s important to note that the tightening of
mortgage standards has made it difficult to find leniency when it comes to getting extra money if
there are discrepancies between a home’s appraisal value and its selling price. For example, let’s
assume you and the seller come to an agreement on the price of an old home at $200,000. If
the appraisal value comes in at $180,000, then the bank will approve the loan for $180,000, not
the agreed price because the lender views the asset as the worth of the appraisal. In a case like
this, the difference is then now the responsibility of the buyer. Appraisals are also partly a
function of the market overall, as the value of a home is determined first by its structural value
(how well it’s built, how new its appliances are, how many bedrooms, etc.). Appraisals also
judge homes by their relative value by the market in which it exists. The house’s proximity to
schools, parks, and highways are all things to consider when buying any home, and can
significantly influence the value of an old home appraisal that might otherwise have a low
appraisal due to structural issues.
Other Things to Consider
An older home will come with some problems that don’t exist in modern homes. An important
potential issue to look for is the presence of lead paint. If your home was built before 1978, your
home might have lead paint in it. Even before the 70s, people were starting to realize that lead
paint resulted in long-term health issues, but there’s still a possibility that the older home you’re
looking at was painted with lead paint. This is something to inquire about and address before
moving forward with the home-buying process.
Termites and other wood-eating insects also need to be inspected for before considering an offer
on an old home. Make sure to inspect and ask about all wood-eating insects, not just termites,
when looking for an old home.Older windows are also something to take into account when
buying an older home. Typically, older homes will have single-pane windows, which are not as
energy efficient as modern double-pane models. Especially if an older home has many windows,
the cost of upgrading this is substantial, and should be taken into account when considering the
overall cost of an old home. Foundational and structural issues are also crucial to consider when
looking at the value of a home. Regulations around homes have obviously varied greatly over the
past 100 years – get an inspector to assess the structural integrity of any property before
considering an offer.
Calculating the Investment Worthiness
Calculating the real estate value of a home needs to be looked at from a commercial vs. personal
perspective. The Capital Asset Pricing Model is a good tool to use here when taking into account
the risk and opportunity cost as it applies to a real estate investment. Let’s suppose you are using
this model to assess the potential ROI of an old home you are looking to buy. This specific
model looks at potential ROI from rental income and compares it to other investments that have
little to no risk (like Treasury Bonds). The expected ROI from rental income should exceed the
relatively guaranteed return on that from Treasury bonds or “safe investments.” If it doesn’t, then
the risk of the rental investment does not make sense. This rings true of all potential rental
investments, but for older homes, the issue can be further complicated in terms of the appraisal.
We see here how much more important the appraisal is, as renting older property will likely
mean higher maintenance expenses and higher rent, thus affecting the overall ROI from rental
income. Less of the rental income can be factored into the overall ROI if the maintenance on an
older home necessitates a draw on the potential profits. The CAPM model suggests taking these
risks into consideration before making this type of an investment or when establishing a rental
pricing structure. The appraisal of an old home within this structure will thus guide the overall
calculation as that value will be what dictates the loan amount, the possible renovations, longterm maintenance, and then the amount that will need to be made back in rental income.
The Bottom Line
America’s old homes are beautiful and historic pieces of architecture but come with a unique set
of hurdles for the modern-day buyer to consider. Getting a comprehensive appraisal and ensuring
a thorough inspection of the home will aid in decisions regarding whether or not it is worth the
investment. When thinking of buying old homes as a rental property, figuring out the
potential ROI vs. the expenses and appraised value will put the decision into perspective.