Short-term returns can be realized with selected properties
A key element to successfully investing in the Atlanta real estate market is to add value. If you do not add value to the property, your chances for a short-term return are reduced considerably.
You should first start with a property that needs that added value - and distressed properties are the best candidates.
I received an email this morning from an investor that has been searching on these so-called “insider real estate investor” websites… you know - the ones that want you to pay a monthly fee for their so-called “insider” information.
Amongst other things, he asked me how to tell if the estimated repairs and after repair value estimates were reasonable.
I can’t comment on that particular website - but I’ve seen quite a few of them over the years. For the most part, I’ve never been impressed by their estimations of value. Let’s just say that their idea of present value and after-repair value differ from mine.
I recently sold a pre-foreclosure on the West side of Atlanta in East Point shown on the left.
The purchaser was an investor who tries to sell his properties before he actually owns them.
He advertised my listing for $109K claiming an after repair value of $170K - and a set of suspicious comps to back up his assertion. Oh yes, those comps were very suspicious.
The truth is that the property, in my opinion, was worth not much more than he paid for it ($85K) and without tearing it down and building another house - there was no way someone would be selling this place for $170K anytime soon.
After all - it’s a 1092 sq. ft. 3 bedroom 1 bath home with asbestos siding and no central heating or air conditioning in a less-than-desirable part of town.
But he did find a sucker an investor before he closed on it.
This new investor paid $97K for it (more than I had it listed for) and took out a loan for $140K to rehab it. It is likely this new investor put down at least $15K of his own money - in addition to taking out the loan - putting this investment at over $155K!
Have you ever heard of the “bigger fool” principle?
I suspect that this property will soon be sold to someone through some shady deal - and will eventually become a foreclosure… one of those foreclosures that we look at and say, “I can’t believe anyone paid that much for that house!”
Unfortunately, I see these kind of situations all the time.
Looking for a good deal on those so-called “investor insider” websites is like looking for a good wife at a brothel.
So what should you do to find a good opportunity?
The first thing you need to do is to determine your strategy.
There are three simple choices:
- Purchase a property to rehab - and sell it
- Purchase a property to rehab - and rent it out
- Purchase a property to rehab - and live in it
Many investors will combine the first two strategies. Put the property up for sale and rent at the same time. Whoever gets there first gets the property. Noted Atlanta real estate guru John Adams is a big proponent of this strategy, and I agree.
Other investors look to acquire a property every two years to take advantage of the income tax exclusion on the profits.
With a strategy - you can focus on how to achieve your goal.
At this time, because of current market conditions, the strategy to rehab and rent out the property is particularly attractive - but if you haven’t been a landlord before… you might want to read up on the subject. It’s not like the TV show “Three’s Company”.
When doing your analysis of the financial feasibility of a purchase, it is imperative to start with a reasonable expectation of the outcome first.
For example, if you plan to sell - you must calculate a reasonable sales price. Not the sales price you want… but the sales price you might get if you don’t get the sales price you want.
Subtract from that the accrued interest charges and other expenses during this holding period.
Subtract from that the anticipated costs to rehab. Be sure to be generous in your estimate, as things often cost more than you expect - or you might discover other items to repair afterwards.
Subtract from that the acquisition costs to close.
Subtract from that the costs to market the property.
Subtract from that the minimum profit you want to receive.
Now you have the price you need to pay for the property.
That’s why successfully flipping properties is a complex task.
If you are a lousy estimator - you’ll either never acquire a property due to low-ball offers that never materialize into contracts… or you’ll acquire properties that make you no money.
The real key to success in rehabbing properties is your ability to get quality work done quickly - at a low price - and to have a good idea how much to pay for a property in the first place.
Rehabbing for rentals is a good long-term strategy.
By rehabbing a property, you can reduce your out-of-pocket investment required to generate positive cash flow.
When you sell a property, you need to consider that 5-10% of the sales price of the property is going to disappear in brokerage fees and sales incentives. By holding the property as a rental, you keep that value as part of the equity.
For example, if you purchase a move-in ready property in Atlanta with 20% down, you may be able to break even on your cash flow as a rental - but you are more likely to have a slight negative cash flow - unless, of course, you use a negative amortization loan.
But if you purchase a rehab property with a rehab loan, you can reduce your down payment to 10 or 11%, and still break even on your cash flow as a rental… and it’s quite possible that you’ll get positive cash flow - without a negative amortization loan.
When considering rental properties, you should first research rental rates in the area that you are considering a purchase to use in your cash flow calculation.
For some - using all of the scenarios above might be best.
Some investors acquire properties - then live in them for the first two years. During this time, they perform many of the improvements - themselves. If you’re handy, then this is a great option. If not, you can still contract out the work.
When these investors hit the magical two-year mark, they find another property to acquire - and move from one property to the next. They clean up the first property for rent - and keep that property as a rental for two years. At the end of the four years, they look to sell the property.
This is a smart way to earn money while shielding yourself from taxation. Since the current tax law allows you to exclude $250K from capital gains on the sale of your personal residence ($500K for a married couple filing jointly) this is a great way to enjoy the benefit - and maximize your property appreciation by holding it for at least four years.
You will, however, need to sell it before five years - or at least within three years of moving out of the property. The current law states that you must have owned the property for at least two years, and that you must have lived in the property for two of the previous five years.
What is the easiest way to find these opportunities?
There’s many ways to discover distressed properties, but our MLS search engine makes it extremely easy to do so.
I have set up distressed property searches (single family homes and condos) for your perusal by county:
Cherokee County Distressed Properties
Clayton County Distressed Properties
Cobb County Distressed Properties
Dekalb County Distressed Properties
Douglas County Distressed Properties
Forsyth County Distressed Properties
Fulton County Distressed Properties
Gwinnett County Distressed Properties
Hall County Distressed Properties
Henry County Distressed Properties
For multi-family (duplexes, triplexes, quads and apartment buildings), please email me with your property requirements and I will personally set up your searches.
Ask The Broker, Foreclosures, Investment Properties, Rehabs, Tips For Buyers, Trends | 3 Comments »
