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The Pros and Cons of Buying Historic Properties

Hearing the news of the fire and devastation of Notre Dame Cathedral, I was at first shocked and then deeply concerned as was the rest of the world. This historic and storied building hosts 30,000 visitors per day according to up-to-date news reports. However, while I’ve been to Paris, I have never visited Notre Dame de Paris, as it is also known. Missing that opportunity was on my mind daily and I started thinking about landmark and historic properties. Of course, nothing on the scale of this 800-year-old landmark, but historic homes and buildings in general.

Notre Dame

How Historic Properties Affect Property Values

When looking into the pros and cons of purchasing and restoring historic properties, you come across much debate on various aspects of the topic. If you’re looking for an investment, however, it is good to know that it is typical for historic homes and buildings to appreciate at a higher rate than non-historic properties.

Donovan Rypkema, a leading authority on the economics of historic preservation stated this in his piece entitled, The (Economic) Value of National Register Listing, Over the last decade a number of analyses have been conducted asking, ‘What is the impact on property values of local historic districts?’ Using a variety of methodologies, conducted by a number of independent researchers, this analysis has been undertaken in New Jersey, Texas, Indiana, Georgia, Colorado, Maryland, North and South Carolina, Kentucky, Virginia, and elsewhere. The results of these studies are remarkably consistent: property values in local historic districts appreciate significantly faster than the market as a whole in the vast majority of cases and appreciate at rates equivalent to the market in the worst case. Simply put—local historic districts enhance property values.”

Yet pricing and profitability of historic properties are subject to several variables. Meaning the profitability of acquiring historic properties is driven by several key factors including: the physical nature of each individual property in your chosen market, current market prices, condition of your target property, social interest in local historic districts and political backing from local government.

Those interested in historical properties, whether for investment or educational/recreational purposes can find an official list of our country’s historic buildings, districts, sites, structures and objects worthy of preservation in The National Register of Historic Places. It was established as part of the National Historical Preservation Act of 1966 and is overseen by the National Park Service.

Qualification Requirements for Historic Properties

In most cases, to qualify as a historic property a building must be at least 50 years old. Additionally, it must be considered to retain a high degree of purpose and command a degree of historical value pre and post rehabilitation. There are strict guidelines to follow for any restorations to the property.

Earning Tax Credits on Historic Properties

As a real estate investor, one perk to owning historic property is that you can receive tax credits for profits made on your investment through the Historic Tax Credit Program (HTC).  The HTC program encourages private sector investment in the rehabilitation and re-use of historic buildings. The federal tax credit allows participants to claim 20% of eligible improvement expenses against their federal tax liability.

How to Find Historic Properties

  • Decide which type of historic property you are interested in: single family or multi-family residences or commercial properties which could include anything from historic gas stations to buildings in a historic town square and everything in between.
  • Ask your Real Estate Agent – Realtors often know a great deal about large geographic areas. They can search for properties specifically by the year built. This could significantly shorten and improve your overall search.
  • The Historical Society in your City, County or State will be a great resource. I’ve found that the Collin County Historical Society in Texas has a Facebook page interested parties can join. Also, see if there are history museums in your area of interest.
  • Online sites like OldHouse.com or HistoricProperties.com can also be great resources for finding historic properties.
  • OTARealEstate.com offers tools like Deal Board and Deal Tracker. These tools are available to all OTA Real Estate students and can be your most useful tool to rapidly sort and evaluate properties of interest.

Financing a Historic Property Purchase

  • Have a primary budget, contingent budget and an absolute walk away budget. As with any mortgage, fees, taxes and other misc. costs can add up. Lenders will usually allow you to borrow more than you can afford, so be prepared and don’t go in over your head.
  • To obtain a mortgage for a historic property, lenders will require all the information typically requested but may require a few additional documents. Be prepared to submit information on historic designation regulations, deed restrictions and easements, for example.
  • While you may qualify for various types of mortgages (FHA, VA, private lending), a historic home may require substantial repairs which could cause the lender to require proof of ability to finance repairs or, if repair costs are included in the mortgage amount, that portion of the loan may be put into escrow and directly paid to the contractor.
  • Historic property purchases in less populated areas may be a red flag for lenders and result in higher interest rates or additional loan guarantees or equity being required.
  • Be aware that properties built before 1978 require legal disclosure of lead based paint and safety procedures to deal with removal if present.
  • Verify Insurability – Building materials and codes requirements have obviously changed over the years. If an older home is damaged they will almost always cost more to repair than a similar, newly built home. That being the case, a historic property may cost more to insure, or not be insurable at all.
  • Taxes – While property taxes on historic homes is usually comparable to that of new ones, there could be additional tax liabilities and/or credits associated with owning a historic home. Unless you are an experienced tax professional, always consult one to make sure you have a complete understanding of the advantages and disadvantages of purchasing an historic property.
  • Hire an appraiser and inspector but don’t just hire any appraiser and inspector. Make sure they are well acquainted with historic homes.

Tips for Owning/Restoring a Historic Property

  • Do your homework. Educating yourself and understanding the official guidelines in any historic property purchases will help keep you in good standing with the National Register of Historic Places. This, in turn, could help you to avoid delays and/or fines that otherwise affect your profit margin.
  • Historic property investors can benefit from looking up the Landmark Society in your given state to identify restoration funds and grants made available to historic property owners.
  • If you are interested in and lucky enough to find a historic mansion for sale it may qualify as rental or office space. This is beneficial for both the investor and the community because, with the right marketing, it could become an anchor property for the area.

With billions pouring in from all over the world I expect to see great things from the restoration of the historic Notre Dame Cathedral. The goal of the Parisian government is to complete the process in 5 years and I’m sure it will still be a site to see.

Happily, it is unlikely that any historic property restoration taken on by you or me will take 5 years to complete. Many times, these type projects are a labor of love and the more information you have up front the more enjoyable the process can be. Sign up for our free event to learn more about the different ways to invest in real estate and how to get started. Wishing everyone the greatest success in your real estate investments.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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