Analyze this deal: the great climate bailout

[waltworks]

So, we live in the mountain west. Summers are getting hotter, longer, and drier. The Colorado is getting lower and lower. Fires are burning everything every summer. My wife and I have wondered if, in our lifetimes, our mountain/ski town will just end up being a slightly cooler version of Phoenix.

We also have some excess cash sloshing around that I was saving for what I predicted to be a Covid RE crash (you can go find the thread)... and prices nationwide have mostly skyrocketed everywhere we'd even vaguely want to invest. Whoops. Looks like I'm not as clever as I thought.

In any case, there's a town in the remote northern Midwest that we have friends at, where we'd enjoy living. It has fun outdoor activities, lots of winter, and is a place that is supposedly not at risk for any of the main problems (ie flood/drought/fire/sea level rise/etc) of climate change. Supposedly.

It's also pretty cheap. A 3/1 SFH in halfway decent shape (it's the midwest, in the middle of nowhere) goes for $100k.

I picked a property essentially at random from Zillow for this analysis:
Cost $125,000
3/2 SFH, built in 1900.
Appears well maintained, electrical and HVAC upgraded to relatively modern standards (ie, no knob/tube, no coal furnace, nothing weird or dangerous)

Original Purchase price: $125,000
Original Mortgage Amount: $90,000 ($35k downpayment, ~25%)
Interest Rate: 4%
Mortgage Term: 30 years
Term remaining: 30 years
Amount remaining on mortgage: $90,000
Gross Rents: $1200-$1500, I'll assume the lower number
Principal and Interest (the P&I of your PITI - should match with the above info): $430
Taxes and Insurance (the T&I of your PITI): $250
HOA costs: $0
Deferred maintenance notes: 120 year old house in a cold climate, but assume nothing major currently wrong

I'd assume $250/mo for maintenance/capex to be safe, and $120/mo for management. Then $100 or so for vacancy.

So I end up right back at $1150/mo, basically, meaning the place makes money, but not any meaningful amount. That's mostly because I'm assuming quite a bit of maintenance, and rent on the lower end, but I think that's a safer assumption than going with the 1% of the house value rule of thumb here.

So while both 1% rule and 50% rule say this isn't bad, it ends up (with my conservative assumptions) just breaking even. As time passes it could do better (rents could rise a bit) and I'm getting some mortgage paydown, but this isn't an area where reselling will yield any profits in the future (IMO).

Normally I wouldn't touch something like that with a 10 foot pole, but this would be more of a climate change bailout option than a serious investment, so all I'd really want would be for it to break even and not be too much headache (I've always self-managed before but this is 1000 miles away, so that's probably not an option). But maybe that's dumb.

Thoughts?

-W

[swashbucklinstache]

How long til you'd moved and what will your annual expenses & stash be at retirement?

Where I'm headed with this is I doubt the midwest will be running out of these houses in the next 10 years and the numbers aren't enough to move the needle, unless they are relative to your retirement stash & expenses. So, I'd probably pass. I'm not a real estate investor or anything, but I pass on these opportunities more or less daily. Just not worth the headache.

In the end, I'm confident the less affluent midwesterners will get pushed out all the same through regional gentrification if climate change accelerates. So, I come back to your numbers more than the house. How big of a deal is it if you have to instead spend 245k for this house in x years? If you buy this place for 125 and it loses value down to 90?

Also, be wary of Illinois' tax future.

A side note, obviously less serious than the items you mention, that climate change includes worse winters than we've experienced thus far.

[waltworks]

All good points. It would not move the needle at all if we had to pay double for one of these houses. We have in the ballpark of $1 million of equity in our existing house and are FI. Even if our current house went to a value of zero, we'd still be FI living in the midwest.

The place isn't in IL, but your point about future taxes is well taken.

I suppose my nightmare scenario is that SHTF and the west becomes basically uninhabitable, our house is worth zero, our investments have crashed, and everyone else wants to move to the parts of the midwest that are still livable. That is probably excessively paranoid on my part, though.

It's worth noting that my investing goals mostly involve generational well-being at this point. Having a climate-proof (maybe) place to bail out to could hypothetically fit into that plan.

But basically unless I find one of these places for like $75k, I agree that it's probably more hassle than it's worth.

-W

[Valley of Plenty]

As speculative investments go, this one doesn't seem terrible. Of course, there is always the possibility that it will be several decades before the effects of climate change become dramatic enough to actually produce the result you're looking for. The fact that it meets the 1% rule with very conservative cost estimates means that while you're unlikely to make money hand over fist in year 1, you probably won't get screwed either.

If you have money to play with and don't mind taking on another property, I'd say go for it.

[swashbucklinstache]

All good points. It would not move the needle at all if we had to pay double for one of these houses. We have in the ballpark of $1 million of equity in our existing house and are FI. Even if our current house went to a value of zero, we'd still be FI living in the midwest.

The place isn't in IL, but your point about future taxes is well taken.

I suppose my nightmare scenario is that SHTF and the west becomes basically uninhabitable, our house is worth zero, our investments have crashed, and everyone else wants to move to the parts of the midwest that are still livable. That is probably excessively paranoid on my part, though.

It's worth noting that my investing goals mostly involve generational well-being at this point. Having a climate-proof (maybe) place to bail out to could hypothetically fit into that plan.

But basically unless I find one of these places for like $75k, I agree that it's probably more hassle than it's worth.

-W

That's a good place to be, $ wise! Makes sense to be looking at tail risk mitigation. I'd probably first park that money in a different hedge strategy, maybe metals or even a Midwest regional REIT or something myself. I wouldn't fault you for doing it, and your expected value outcome would probably be fine. To be clear on my biases, I just see an investment with little upside in normal times, high upside in low probability times, and meaningful potential downside (headache) and run the other way. I'm a "reduce today's variance, roll with it later" person at heart.

You might reevaluate how you feel about other tail risks from a generational standpoint too. Things like citizenship in multiple countries, investing purposeful attention paid to cultivating social capital now that $ is covered, or even assets in non-dollar currencies.

Best of luck.

[waltworks]

As speculative investments go, this one doesn't seem terrible. Of course, there is always the possibility that it will be several decades before the effects of climate change become dramatic enough to actually produce the result you're looking for. The fact that it meets the 1% rule with very conservative cost estimates means that while you're unlikely to make money hand over fist in year 1, you probably won't get screwed either.

If you have money to play with and don't mind taking on another property, I'd say go for it.

I don't know. 1% rule is just a broad brush thing - in this case, maintenance really kills the return (using my assumptions). If I don't expect to get ~10% cash on cash, I might as well just dump money in the market and not worry about it.

If you assume less maintenance and more rent, you could hit that number, though.

I'm not concerned about planning for events decades in the future, but it's true that I probably have plenty of time on this. Thanks for pointing that out.

I think I'll keep an eye out for a property like this <$100k and see if something pops up.

-W

[waltworks]

Ok how about this one.

Cost $99,000 - been on the market a while, could probably get for less
5/2 SFH, built in 1900.
Appears acceptably maintained, electrical and HVAC upgraded to relatively modern standards (ie, no knob/tube, no coal furnace, nothing weird or dangerous), owner has added 2 of the "bedrooms" (one is a former enclosed porch) which appear DIY/not amazing construction.

Original Purchase price: $99,000
Original Mortgage Amount: $74,000 ($25k downpayment, ~25%)
Interest Rate: 4%
Mortgage Term: 30 years
Term remaining: 30 years
Amount remaining on mortgage: $74,000
Gross Rents: Currently rented (through May) for $1500
Principal and Interest (the P&I of your PITI - should match with the above info): $353
Taxes and Insurance (the T&I of your PITI): $200
HOA costs: $0
Deferred maintenance notes: 120 year old house in a cold climate, some semi-crappy additions in the last 20 years. Roof and mechanical appear ok.

$150 for management, $100 for vacancy, $250 for maintenance.

I end up at around $1000 in expenses, for $1500 in rent. Seems pretty good.

Downside is this is not particularly a house we'd love living in for a variety of reasons.

-W

[joe189man]

let me preface this by saying i "own" my home and own no rental real estate, but have researched the midwest quite a bit and am from a northern midwest state.

i recently was looking at homes in Sartell, MN, a town just north of St. Cloud (college town) on the Mississippi river. this town has excellent schools and appears to be newer and growing. i found a home, that looked great on zillow from a maintenance and neighborhood perspective, that is selling for less today than it did 8 years ago. Appreciation in home price isnt guaranteed or expected in much of the midwest.

Why not look at acreage or farm ground as your investment, lake property for a Air bnb? Minnesota has some of the highest taxes in the country.
maybe some ground is available up by spirit mountain in Duluth (700 vertical ft.) or Lutsen (825 vertical ft.)?

[waltworks]

Again, I'm not looking for appreciation. I'm aware that probably isn't in the cards. I'm looking for cash flow or at least not cash loss, and a place I can stand living if the whole west burns down.

I have run an AirBnB. Never again. No interest in nightly/vacation rentals, I've always done well with long term on properties and the hassle is SO much lower.

I don't know enough about farmland to know where to start with that, and I can't move to farmland.

Honestly, I'm pretty tempted by place #2. But there's probably something horribly wrong.

-W

[theoverlook]

If it's a place you're looking to move to, I'm surprised you wouldn't want acreage. Not so much for the opportunity for gains, but for space between you and neighbors coupled with natural areas to enjoy. If I was moving to the middle of nowhere, dozens of acres would be around the house. Preferably wooded. I'm sure you could still rent out a house with woods, but I guess the cost would be higher and so it wouldn't return as well if at all.

[uniwelder]

This is slightly off topic, but fits in the general discussion-----https://projects.propublica.org/climate-migration/  and the northern midwest should be a favorable place to live according to their research.

It's a series of projections for the next 20-50 years regarding US climate change and its effects on flooding, wildfires, agriculture, livability/comfort, and economics.  Lots of neat visuals that show a shifting suitability map for where the most desirable places to live are shown.  I'm not sure if anyone has posted about this before--- a quick search hasn't brought it up. 

[waltworks]

This is slightly off topic, but fits in the general discussion-----https://projects.propublica.org/climate-migration/  and the northern midwest should be a favorable place to live according to their research.

It's a series of projections for the next 20-50 years regarding US climate change and its effects on flooding, wildfires, agriculture, livability/comfort, and economics.  Lots of neat visuals that show a shifting suitability map for where the most desirable places to live are shown.  I'm not sure if anyone has posted about this before--- a quick search hasn't brought it up.

Yes, this (and other similar research) is what I'm referring to. I'd rather be ready to migrate anytime/ahead of time than wait until my current home burns down.

-W

[waltworks]

If it's a place you're looking to move to, I'm surprised you wouldn't want acreage. Not so much for the opportunity for gains, but for space between you and neighbors coupled with natural areas to enjoy. If I was moving to the middle of nowhere, dozens of acres would be around the house. Preferably wooded. I'm sure you could still rent out a house with woods, but I guess the cost would be higher and so it wouldn't return as well if at all.

I do not want to be plowing my way to town to go to the store, or riding a snowmobile in subzero temps to take a child to the doctor. Acreage is great, but not for me. There is plenty of public land to recreate on (in fact, an insane amount of it).

-W

[PMJL34]

Waltworks,

From what little bit of posting I know about you, sounds like you are just bored and tired of not being able to put your cash to work. You're clearly knowledgeable about real estate and FI so there's probably not much advice I can give you except that I too am growing impatient, but these hypothetical houses don't interest me at all. I worry about climate change, but I have a feeling these hypothetical houses will be extinct/fall apart before the climate change makes the area more desirable :)

I think the bigger question is what should we invest in, in Oct of 2020? I choose to keep purchasing VTI and some extra payments at my primary when I feel like it. Boring I know, but it is what it is until something changes.

Best of luck!

[Papa bear]

Basically every rental I have is in the 100-140 year old range.  These places had been hacked together for a LONG time and they have all been total or close to total gut jobs. Sure, you can “slumlord” the place out, hell, that’s probably the expectation there, but don’t think you’d be happy moving into a place like this and not want to tear everything apart.

I wouldn’t buy one unless I had eyes on the place or if I could factor in the costs for a total remodel at some point in the future. 

That being said, I don’t think you lose anything on a deal, outside of maybe transaction costs, if you do go that route.  It’s a conservative investment, and given the rents, you might make a few bucks to be diversified outside of desert fire land.


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[lavaflow8]

It seems like it wouldn't be too hard to break even with one of these properties.  That's obviously not the best use of your money, but this is a small percentage of your net worth and the peace of mind of knowing you have a place if SHTF could be worthwhile.  Out of curiosity, do you mind sharing what state or area you are considering?

[maizefolk]

If the concern is just having to pay more if you wait, and you can afford to pay more, I would avoid purchasing a house at this time. Right now you're going to select for houses that can maybe/sort of pencil out as rental units, which may not be the kind of house you'd choose to live in, given the choice if and when you decide to relocate out to that part of the world (Personally, I'm guessing the UP of Michigan or around Duluth in Minnesota, that's where I'd want my fallback house to be).

If you're worried that there may not be houses for sale at any price you'd be able to pay by the time the climate justifies moving to the upper midwest, then the question becomes how effectively you'd be able to evict your tenants and move in in a world is falling apart type scenario.

[waltworks]

That's a good point (and some clever guessing) Maizefolk. If SHTF, I'm not sure it really matters, because if civilization collapses I don't think my chances are that much better in the northern midwest than anywhere else. Evicting tenants probably wouldn't be an issue in that scenario, since I'd have to drive 1000 miles through hordes of zombies or whatever to even get there. And it's not as if I'm a capable farmer.

So I suppose it's more that I'd move if I wanted to be there and things were getting slowly but surely crappier where I am. That's probably doable anytime, really, without worrying about rental income or anything complex like that.

-W