What . . . Now?
The headlines are full of reports on the state of real estate in the US today. Here is a quick look at two of the most popular methods “as seen on tv” or possibly from the local real estate investor club. WHAT types of investments make sense NOW?
Flips are buying distressed property with the intent of rehabilitating, or “rehabbing,” the property for a quick turnaround for sale. Rehabbing for flip is a valuable commodity for any community because an investor who does this well takes a run down property, possibly an eyesore, and puts time and resources into making it sellable. With that sale, a property is refreshed with a new and potentially better owner than the one who let it go down hill.
The challenge with flips today is who is going to buy the property when it is complete. Before trying a flip, the investor would be best to have a prospective buyer or specific niche target market. It’s a challenge, but not impossible.
Foreclosures may be distressed or possibly just properties the owner walked away from when they could not longer make payments. This method of investing again is valuable not only to the community in recovering a distressed address, but also to the previous owners and the bank. Far from being a vulture, a pre-foreclosure specialist rescues an owner from a worse situation of full foreclosure and the bank is saved from a defaulted loan.
Anyone who has read a paper or watched the news is sure to know that foreclosures are in record numbers today. This plays into one of two camps. First is that you can’t get hurt in a crowd. There will be so many properties to choose that a good deal is hard to miss. The other perspective is the Warren Buffet thinking. If everyone else is getting into it (for Buffet, a stock), then Buffet is getting out. Too many amateurs ruin the profits for professionals.
WHAT … NOW?
Any of these typical and cyclical methods are as appropriate in good times as well as less than ideal times. Like any business, a successful investor wants to know how to get to return on investment. In both given options, the challenge is a new owner. The underlying premise, though, is that the investor will want to be prepared to hold a property as long as it makes sense. Quick turnarounds are not likely in this economy.
How to leverage this? The deal has to be able to positive cash flow for long term. This means a discount purchase, competitive financing, and at least average occupancy expectation. A diligent search can most likely find multiple prospective properties. To get the best deal, which the investor will want before going to the bank, he or she should get competitive bids from the sellers. Always be ready to walk away from a deal that doesn’t give plenty of margin. Financing is challenging as well, but the good news is that it is available. Be prepared to to apply to numerous lending institutions.
Occupancy is possible in two directions. One option is to prepare the property to be a rental from day one. Long term holding gives tax incentives and moderate income in the short run and large returns the longer it is held. If the investor wants to be more aggressive with risk and return and can hold the mortgage, lease to own makes sense. This gives the tenant incentive to maintain the property themselves as well as make timely payments. In a tight lending market, this may help out earnest buyers that may not qualify for standard lending. Depending on local laws, lease to own does not preclude the investor from removing a non-performing tenant.
Is it a bit overwhelming? Possibly . . .and that is why having professionals in several areas available for advice and opportunity is critical. Ironically, one of the reasons large commercial properties are not turning over even though they are underperforming is because there aren’t good options out there, and real estate always make a come back. Commitment to the a long term investment through thorough due diligence is the method for success for the individual real estate investor.