Tuesday, April 9, 2013

Is 2013 the Perfect Time to Buy Residential Income Property for Investment?

Sophisticated Investors Are Pouring Huge Money Into Residential Real Estate

In today's market, as we're coming out of the real estate recession, it's pretty clear that there's a consensus regarding these two things: interest rates are going to remain low, at least through 2013, maybe 2014; and home prices, which seemed to have been falling for years, seemed to have hit bottom and are starting to come up again. I think these two realities present two opportunities for people, and the sophisticated investors have jumped all over this.

Hedge funds, investment pools, and many very well healed companies and investors are buying hundreds and thousands of real estate pieces at a clip.  They've identified that housing has bottomed out, and they think that values will start to appreciate. This suggests that, if you're thinking about getting an investment property, this is a good time to buy one.

As an investor, you might be looking for cash flow.  You are seeking a property that after all the costs of buying and maintaining the property , which is say your mortgage payment, your property taxes, your insurance, any management costs you might have, and some repairs, you can get enough rent each month that you're in the black?  You have cash left over to pay for your own expenses or reinvest.

You might be happy even if you're breaking even, because you expect that over time the value of the property will begin to appreciate again. Real estate has been growing at around 2% a year when you look at it over 30 or 40 years.  If the investment isn't costing you anything and it's growing, it's a very logical thing to do.

Investors Are Also Back in the Fix and Flip Business

Most people who are buying a home or residential property as an investment do not want to spend time and money having to fix it.  They don't want to have to get contractors and plumbers and tear down walls, reroof, redo kitches.  It's a lot of work, it's high cost, and it's often categories of involvement that people don't have too much experience in.

But for the person who is willing to get a fixer-upper, I think that's, dollar for dollar, the best way you can spend your money. The typical example I'll use is a case that I'm working on currently.  It's a single family home, and it's not in good condition.  It definitely needs work.  It's livable, you could move in to it tomorrow, but you wouldn't want to.  It's a 1,700 square foot house on a 9,000 square foot lot.  In that neighborhood you're going to want to expand and make it a 3,000 foot house.

My client purchased the house for $890,000. They met with some architects and contractors, and they found for about $550,000, they can turn this into a much bigger, much more beautiful, modern house.  Plus, they can design the house so it really meets the high end homeowner’s needs.  Some people like big master bathrooms and big closets, some like big living spaces and decks. You want to have staircases on the second floor, you want to have a gazebo in the backyard.

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If you are willing to get a residential fixer-upper, I think that's the best way you can spend your money.

So they are going to buy the house for $890,000, put $550,000 into it for a total cost of $1,430,000. The lender that we're working with did an appraisal on what they believe that house will be worth roughly a year from now when the construction is finished.  In this particular neighborhood, it's expected the house will be worth $2,000,000.

So you can imagine a lot of people doing this right now are investors, contractors, or real estate developers.  They see the value of buying something, putting money into it and fixing it up, and having it be worth multiples of the investment. Flip it, and go out and do it again.

So rather than limiting yourself to thinking that you want to buy a beautiful new condo or a house where you can move in tomorrow, do what the investors are doing.  Look for something that needs a little more work, and put some time and energy into it.  You can move in and live in the house while under construction as a bonus.

Timing Is Perfect For Buying and Fixing Less Desirable Properties

As this post is being written in April of 2013, there are very few desirable properties on the market in Southern California, especially in the better neighborhoods.  As a result and nice home that comes on the market is getting multiple offers, almost without exception, and for some of those offers people are saying, "I'll give you cash, no appraisal, no contingency, we'll take it as is," because they're getting desperate.

On the other hand the homes that aren't getting multiple offers, or certainly aren't being overwhelmed by great offers, are homes that need a little work. They don't have to be teardowns.  Maybe they need a new roof, and it's got some mold in the kitchen. These are not attractive things.  You're going to want to fix it.  The problems are enough, though, to turn off a lot of people.  So much so, that if you go for this type of property, you probably have a better chance at getting it.

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