Archive for the 'Investing in Real Estate' Category
Investing in Raleigh Real Estate - Buy and Hold Earns You Big Bucks
November 9th, 2007 Categories: Investing in Real Estate
The Raleigh real estate market is just about perfect for a solid buy and hold strategy. And if you pick the right neighborhood, you can make a very large return on your investment.
In the first 2 parts of this series we basically explored every aspect of fix and flip. I don’t know about you, but to me, fix and flip looks risky and requires lots of working capital. Fix and flip demands that you somehow outsmart the market and find properties that are way under value.
The market will resist you on this. The market will do its best to make every transfer of real estate happen at full value. As long as we have strong demand and relative low supply, you will be forever frustrated trying to find the elusive “good deal.” So what is a real estate investor in the Raleigh area to do?
Quit swimming against the current. That’s what savvy investors do. They look at the market dynamics and use them to their advantage. What’s the key dynamic in the Raleigh market? Steady appreciation in value, over time, that runs just ahead of the rate of inflation. It’s this predictability that makes buy and hold the winning strategy in the Raleigh real estate market.
Here’s a quick example of what would have happened with a modest investment in a townhome community near Research triangle Park (RTP) over the past 4 years. This scenario is based on a highly popular product (a maintenance free townhome), in a great location for rents from young professionals (RTP), and a steady upward rate of appreciation (the Raleigh market).
This is an example using a townhome that was actually sold as brand new in 2003 and resold 4 years later in 2007. The 33% appreciation is right on the average for the neighborhood. This neighborhood is full of townhomes that costs approximately the same when they were new in 2003 and have sold for approximately the same price as our example in 2007.
I checked rents for a 3BR apartment in this area and the average is $1,100 per month. The principle and interest payments are based on a 20% down payment of $24,000 and an interest rate of 6.5% for a 30 year term on a loan amount of $96,000.
Sorry about all the numbers, but if you’ve been following along you may be beginning to realize that this example gives us a 167% return on investment, cash on cash! When this townhome was sold in 2007 the owner got the original investment of $24,000 back plus a cool $40,000 for their trouble.
Does this sound like a good investment strategy? I certainly think so. You would be hard pressed to make this kind of return in any other investment.
Sure you would have had a few maintenance issues to deal with over the years, but how bad could that be on a new home? Just get a good inspection to make sure you are getting it in good repair from the builder. And you would probably have a few months vacancy with a negative cash flow.
Okay, to allow for some vacancy, let’s reduce the profits by $6,600 ($1,100 x 6 months) or so, just to be on the conservative side. But let’s don’t forget that this scenario actual had cash flow of $262 ($1,100 – $838) per month. Any way you figure it, this strategy works… and it can make you lots of money.
Want to talk about getting into the real estate investing business here in the Raleigh area. Give me a call or email me and I’ll be glad to schedule an appointment to meet with you and help you better understand how to acquire wealth through real estate investing.
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Investing in Raleigh Real Estate – Let’s Make Money on Foreclosures
Investing in Raleigh Real Estate – Fix and Flip is a Challenge
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Investing in Raleigh Real Estate - Let’s Make Money on Foreclosures
November 8th, 2007 Categories: Investing in Real Estate
Is there money to be made buying and selling foreclosures in the Raleigh real estate market? Maybe. Is it easy? Making lots of money typically isn’t easy. This explains why there aren’t more rich people. Can it be done? Yes, but you have to find the right one! In this 2nd installment of a 3 part series on investing in the Raleigh real estate market we’ll discuss the truths of buying foreclosures at a bargain.
Truth #1: Making money on foreclosures cannot be done by looking for oportunities in the usual places. Let me get the bad news out of the way first. In part 1 I explained how I get lots of calls from people who want to approach fixing and flipping houses in a casual, part time manner. It’s difficult at best to do fix and flip with such an approach. Chasing foreclosures as fix and flip opportunities doesn’t make it any easier.
The real challenge with foreclosures is to discover the ones in which the bank has a good finiancial position. More about that in a minute. Or, you could try to get involved before the bank has spent lots of money in the foreclosure process. Go to the courthouse auctions, but expect lots of company. Big discounts usually attract big crowds. Big crowds tend to bid prices up. That being said, there are those who successfully buy their investment properties this way.
By the time a foreclosure is listed in our Multiple Listing Service (MLS), the bank has tried everything they can to minimize their losses. They have also spent lots of money getting to that point. That’s right. Banks typically loose money on foreclosures. Once you understand this, what I’m about to tell you makes a lot more sense.
Truth #2: Banks do not necessarily sell foreclosures at bargain prices. One of the other calls I frequently get is from a home buyer who just wants a “good deal.” Nothing wrong with that. I want a good deal too. Everybody does. This person usually isn’t looking to invest in real estate. They just want to buy a home for less than it’s worth. At some point in the conversation the buyer will suggest that we look for a foreclosure because it will be less expensive.
Please understand. There is nothing about a foreclosure that suggests it is a bargain. Many foreclosures come from highly leveraged buyers who fell on financial hard times. It is not at all uncommon for the loan amount to be equal to the market value of the house. Sometimes the loan amount can even be more than market value. Here’s why that’s a problem.
Banks are terribly inefficient home sellers. The internal cost of the foreclosure process to a bank would probablly surprise you. I’ve heard that it can cost a bank 10%, or more, of the loan amount to take foreclosure all the way to collecting money from the sale. That makes sense. The selling costs for you or me could easily be 6–7%. Regulations can make up the other 3–4% of the cost of selling for the bank.
If the bank forecloses on a $200K property that has a 100% loan amount, they might have to sell for $220K just to break even. Of course that won’t happen because the market will not deliver a buyer at that price. If they sell at $200K, or market value, then they loose $20K. Do you see how this could be a problem? This is why foreclosures, especially highly leveraged ones, are not sold at bargains prices.
Truth #3: You will have to look at a huge number of foreclosures to find the right one. Basically, you are going to have to find a house that had something like an 80% loan balance. Now the bank can sell this one for 10% below market value and break even. Will they? Maybe, but I’ll bet you will have to negotiate them hard. They would probablly like to turn a profit on one of these to cover losses on others.
Truth #4: Foreclosures should be considered just as you would any other investment oportunity. When I get the calls from the non-investor home buyer looking for a good deal, I tell them that we will look at foreclosures, just not exclusively. The advice is the same for real estate investors. Don’t get too hung up on the elusive bargain priced foreclosure. Just be ready to move quickly when it comes along.
I’ll admit that the first 2 parts of this series have made investing in real estate look like something that takes lots of time, capital, and expertise to do it right. Well… it does. That’s thruth #5.
But I have some good news for you! In part 3 we will discuss a stategy that anyone can use to make lots of money. And you will not have to work near as hard finding a suitable property. These properties are plentiful. It’s called buy and hold and it works pretty well in the Raleigh real estate market.
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Investing in Raleigh Real Estate – Fix and Flip is a Challenge
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Investing in Raleigh Real Estate - Fix and Flip is a Challenge
November 7th, 2007 Categories: Investing in Real Estate
The Raleigh real estate market, in general, is NOT conducive to flipping houses for a quick profit. Believe me, I’ve looked for these opportunities. In general, they do not exist here. At least not in a form for which the casual participant has the budget or the expertise. This article is part 1 in a 3 part series on investing in Raleigh real estate. Today, we’re going to talk about the challenges of flipping houses for a profit.
I get several phone calls each week from people who introduce themselves as investors. The call usually goes something like this. Caller: I’d like to find some houses to fix and flip. If you can find them for me, I’ll buy them from you and then let you list them for sale. Me: Great! What’s your criteria? Tell me what you’re looking for. Caller: Gee, you know. Anything that I could paint and replace the carpet and make about a 20% return in 30 days or so. Me: What’s the 20% based on? You’re talking about 20% return on your cash investment, right? Caller: I don’t think so. I want 20% on the price I paid for the the property plus all my expenses. Me: I think we need to talk about the realities of investing.
Let’s look at a typical $200,000 fix and flip opportunity. Carpet and paint inside and out could easily cost $15K, especially if you don’t do any of the work yourself. Buying and selling expenses, and carrying charges for borrowed money, could be another $15K. Remember, you have to pay expenses when you buy and when you sell. So far you would have to buy a $200K home that needs carpet and paint for $170K just to break even.
The typical caller I mentioned wants 20% on the price of the house and expenses. Let’s assume that’s 20% of 200K. That’s $40K in profit which now means the house must be purchased for $130K. Where in the world are we going to find someone who will sell their home, which needs carpet and paint, for 35% less than it’s worth?
Okay. Let’s say that the caller will settle for only $5K profit. That’s not much money for such a large risk, is it? In this case we would still have to buy a $200K home that needs paint and carpet for $165K. Great. Now we only have to find someone who will sell such a house for 18% below it’s market value.
Are you starting to see the difficulty with finding a suitable house to flip? No one in their right mind would sell their $200K home for $165K. They don’t have to in our market. Even if a seller were unwilling, or unable, to invest the $15K for carpet and paint to get full market value, he could drop the price only $20K and some buyer would come along and be very pleased with the bargain price.
Flipping does work for some in our market, but it involves much more than making cosmetic repairs. Homes in Raleigh’s Inside the Beltline area are great candidates. The North Hills, or Midtown, area is also fast becoming a great fix and flip market. But the level of work involved typically goes way beyond cosmetic things like paint and carpet. Complete gutting and remodeling can bring huge returns. In many cases, builders will pay $400K for a house, tear it down, and build a custom dream home in it’s place.
This is a very profitable business which takes considerable capital and expertise. It’s not a weekend hobby for these guys. It’s their full time job. And even the experts make mistakes sometimes. If it’s a remodel, you have to know exactly what’s involved and what the market will bear for a finished product. With great reward comes great risk.
Check back tomorrow for part 2. We’ll discuss foreclosure opportunities. Then on Friday we’ll talk about a buy and hold strategy that can net some huge gains over time. See you then!
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