Who can afford a teardown home these days?
On my way to work each morning, it’s not hard to find new homes under construction.
The interesting thing about some of these new home builds, there was already a home in that location to begin with. Welcome to the world of teardown homes.
Here is an example, in the Alta Vista neighbourhood of Ottawa:
Homes in this area, depending on the building condition of course, can sell from anywhere between $500,000 – $800,000.
Some of these established homes were lived in for many years; they were not necessarily all dilapidated and in need of major repairs – although I can only say that from a drive by perspective.
This makes me wonder (when I see a new home being constructed on the same lot as the previous home): who can afford a teardown these days?
I can only assume these folks have some deep pockets and some level of irrational thinking:
- They need to purchase said home on lot to demolish. Say $500,000 – $600,000.
- They need to demolish said home and rebuild. Say $200-$300 per square foot in Ottawa. This new home in my picture seems to be 2,000+ square feet so at the low-end that’s a $400,000 expense.
- They need to live somewhere while new home is being constructed. Let’s put those operational costs at minimum > $12,000 per year assuming the homeowner is debt-free (i.e., assume city of Ottawa taxes are $6,000; assume heat, hydro, water, telcos cost another $500 per month or $6,000 per year; this does not include any other house maintenance or operational costs).
My numbers above are conservative. All told, in this area of Ottawa, you’re looking at more than $1 million for your tear and and re-build investment.
It seems irrational until you consider one thing – in urban centers the demand for land is soaring. To paraphrase Mark Twain on real estate investing: buy land, they ain’t making any more of it.
There seems to be a growing trend to move away from rural areas and suburbia in general, to go back to the city, something my wife and I are strongly considering here and here. This makes city of Ottawa property in my Alta Vista example rather valuable now and potentially far more valuable in the future. This could result in a perfectly rational decision in another 10 or 20 years.
Potentially the question some folks might be asking themselves is something different than what I proposed above. How can I not afford to go ahead with a teardown home?
What are your thoughts on the teardown phenomena? Good decision based on location? Bad decision in general?