BiggerPockets

Exit Strategy: Real estate investment that maximizes appeal to home owners

Friday, November 25

I have always believed in the simple principals of property investing: purchasing in the best location your money will get you, buying at the bottom rather than the top of the cycle, crunching the numbers properly and carefully understanding what due diligence is necessary and how to do it.

Over the long term, real estate that adheres to these principals has proven to be a strong wealth preserver, a steady income earner and a smart hedge against local inflation. I´m not suggesting that people should allocate a large proportion of their wealth to real estate. However I certainly think it can safely be considered as a valuable addition to a balanced portfolio.

Track record

I have been active in the distressed real estate market in Florida ever since it first appeared. That being said, I´ll never know the market as well as a local.  

Because of that I think it´s vital to work extremely closely with established partners who grew up here, know the industry inside out and have a lifetime of experience to draw from. That experience has probably saved me tens of thousands of dollars over the years.  

Recent Trends 

Monthly sales figures from the ORRA illustrate that buyers have been relentlessly snapping up inventory at record low prices and at a pace exceeding the boom times of 2005 and 2006. Demand is way ahead of supply (for example, sales of Florida condos are up 63% year on year).

An inevitable consequence of this is that quality inventory is very tight and prices are rising in some sectors. Inexperienced buyers are beginning to lower their standards and are making the same old mistakes all over again - i.e. buying in the wrong place at the wrong price and failing to carry out essential due diligence.

Getting it right first time

It doesn't have to be this way - getting the important aspects of purchasing real estate right is not rocket science. The most important thing to remember is that future investors are not your exit strategy. Investors are certainly active now but they will probably be dormant, selling or buying somewhere else in the future. 

Owner occupiers, first time buyers and second home owners are your future buyers and that is who you need to keep in mind when you´re purchasing now. Figure out what these people want and you´re well on your way to making a profit.

My real estate strategy revolves around selecting properties that adhere to both what I as an investor would like (wealth protection, income generation, inflation hedge) and what a future home buyer will want (great schools, solid infrastructure, low crime rate, recreational activities, realistic access to bank finance and a well maintained and funded local community).

So there you have it - find a property that matches an investors requirements today and a home buyers tomorrow. I´m not saying it´s easy - but if you can do it, then rental income should be more reliable and resale opportunities more abundant.  

House prices in USA have fallen faster but also recovered faster

Thursday, June 16

Many condo buyers, particularly in Orlando, are facing three tough options

Wednesday, June 15

I mostly sell in Orlando, and I´m finding that large numbers of our condo buyers, especially those of modest means, are now faced with three options. 

The first is that they continue trying to find good value properties in middle class areas in the $60,000 - $100,000 range. This is now extremely difficult due to a very low inventory, high demand, and banks holding tightly onto the majority of their foreclosure stock (it´s taking much longer than usual to buy short sales these days). 

If the first option of purchasing units ranging from $60,000 - $100,000 is very limited, the next obvious option is that they move further up the food chain and purchase higher quality condos located in the best neighborhoods in the $95,000 - $150,000 range. 

There is a decent selection of these available to those in the know and they offer very solid cash flow with potential of excellent medium term capital growth.  Best of all, they will be the first to provide equity release and resale opportunities when mortgage lending makes its long overdue recovery. This last point is crucial. 

The third option is you move down the food chain and source properties in lower income neighborhoods in the $35,000 - $50,000 price range. Some of these look like unbelievable bargains compared to what they were selling for in 2005/6. 

Appearances can be very deceptive with these deals though. Experience and gut instinct tells me that most properties purchased in low income areas towards the end of a recession will generate highly irregular income and will take an unacceptably long time to generate meaningful capital growth. 

If you´re going to be an "absentee landlord" and will be relying on a local company to manage your tenants, my advice would be to stay well clear of low income neighborhoods. Keep saving until you can afford something better. 

All the best

Colin Murphy

Torcana 

Due diligence performed on a low income condo community in Orlando

Monday, June 06

Let me describe a lower income community that came across my desk recently. I did some basic due diligence and number crunching on it. On first glance it looked ok - an Orlando gated community with swimming pool, fitness center, children´s playground etc. Units ranged in price from $38,000 - $45,000 and net returns were 7-10%. Many of Orlando´s main hotspots were within a 15 minute drive.

What´s not to like?

Plenty as it turned out. The HOA reserves were hopelessly inadequate to maintain the facilities and the building structures. Almost 50 of these units were in foreclosure or short sale with asking prices way below what was being offered to me. Average household income was one of the lowest in the city and the crime rate was very high.

Most of the leases of the tenanted units had expired or were about to expire. Driving around and through this neighborhood was like something out of The Wire, a gritty TV show based in Baltimore.

Does the condition matter as long as the property earns an income? 

Perhaps you´re not too bothered about the condition of the property as long as it´s generating a 10% net return? I mean, it´s not like you´ll be asking your mother to spend the summer there minding the kids right?

However, you might want to consider the following: the rents will decrease because there are too many vacancies, your HOA will increase because too many people aren´t paying their monthly dues. Your repair bill is going to be high because the properties are nearly 30 years old and these tenants are much more likely to break stuff than those renting in a wealthy neighborhood like Dr. Phillips /Bay Hill. You will also have regular vacancy periods due to tenants regularly leaving and/or refusing to pay their bills on time.

In other words, that +10% net yield can turn into -10% quicker than you can believe. After all, we´re only talking about +/- $4,000 per year on a $40,000 property.

Anyone else out there have horror stories from buying a property on the wrong side of the tracks?

 

Regards

Colin Murphy 

Ten common sense tips for purchasing real estate

Tuesday, May 17

I´ve written this article as a guideline to those considering a purchase in Florida. While property prices are at record lows and incredible bargains are available, it is just as easy to make the wrong purchase decision now as it was during the boom years.

Many of these tips are universal and can be applied to any property market. Most professional readers would adhere to this unconsciously, but it´s always useful to outline in an easy to digest format.  

Here are my top ten tips: 

1. Do your homework on the neighbourhood

You can look up the average household income and crime statistics for any neighbourhood in a matter of minutes and it could save a small fortune. Imagine that you´ve a choice between one property selling for $50,000 in an area with an average household income of $25,000 and another property selling for $60,000 in an area with an average household income of $40,000. You´d be much better off paying $10,000 extra for a better rental and resale market.

2. Visit the property yourself, or have someone you trust do so

An advert promoting a $30,000 property within 12 minutes of Disney might sound like a no brainer. The thing about Orlando is that nearly every neighbourhood, good and bad, is within a 10-20 minute drive of hotspots like Disney, Universal Studios, Sea World and Restaurant Row. 

Like most big cities, great neighborhoods with huge mansions can be less than a mile away from horrible ones with rows of boarded up properties. You need a lot more than Google maps to determine if the location is good or not.

3. Check out the rent roll

If you are buying a pre tenanted property with the aim of earning a regular income, then ask to see an up-to-date copy of the rent roll. This provides invaluable information such as how many units are vacant, what each unit is renting for, when each lease started and when each lease will expire. 

4. Foreclosures: Make sure the number is manageable

The more stable a community it is, the better for all home owners. If you are thinking of buying a unit in a community of 300 homes and 80 of them are in foreclosure, you could be in for a rocky ride. These properties will probably be sold for much less than what you´re paying for yours and rented out for less than you can afford to rent yours out for. Try and buy somewhere where less than 10% are in foreclosure. 

5. HOA Reserves: Make sure they are adequate

In Florida, all condo home owners have to pay HOA fees which usually range from $200-$300 per month. Your Home Ownership Association (HOA) is responsible for looking after the common areas and facilities of the whole community and insuring the common areas and exterior structures of all buildings (i.e. walls & roofs). 

Ask for a copy of the HOA accounts before purchasing a unit. This should tell you how many people are paying their HOA fees and what reserves they have in place. If either of these is inadequate, you could be in big trouble as your fees will be increased dramatically if a) the clubhouse roof needs to be replaced and they have insufficient reserves or b) not enough people are paying their fees to maintain the resort on a monthly basis. 

6. Budget for repairs and vacancy periods

All properties, from the very top to the very bottom of the food chain are going to have vacancy periods and repairs that will eat into your income stream. Budget at least one month’s rental income each year being spent on these issues. Older properties, cheaper properties and properties in low income neighborhoods will have correspondingly higher vacancy and repair costs. 

7. Closing and running costs: Make sure you know what they are

For properties priced in the $50,000 - $150,000 range, you should budget approx $2000-$2500 to cover basic legal and title insurance. Running costs include HOA, real estate taxes, property management and home insurance (optional but highly recommended). 

8. Get a decent management company and be aware of all its fees

A professional management company that manages your property and your tenants well over a number of years is worth its weight in gold. In almost every scenario, it does not pay to appoint a small inefficient company who undercuts bigger and larger competitors with cheap commissions. 

The better your management company is at doing his/her job, the happier the tenant will be and longer he/she will stay. It is common practise for management companies to charge additional fees for placing a new tenant or renewing the lease of an existing tenant, so you should make yourself aware of these and input them into your calculations. 

9. Get a referral from the selling agent

If your agent has been in business for a few years, he/she should be happy to put you in touch with a couple of satisfied clients who can verify that they are happy with the service received.  

10. File your tax returns

This is especially for overseas buyers purchasing US property: All owners of USA based property must file tax returns in the USA every year, even if the property is not earning any income. Overseas residents will need to get a tax number (ITIN) and a non resident social security number. This is a very simple process and filing returns every year shouldn´t cost more than a couple of hundred dollars. There are plenty of specialist companies who can prepare and submit this paperwork on your behalf.

 

 

Kind Regards

Colin

Orlando should provide the best risk/return ratios in 2011

Monday, December 27

I´ve had US housing numbers coming out my ears this year and I´m going try and ignore them for the next week. For those who don´t want to watch Harry Potter or Willy Wonka on television, there´s no shortage of housing statistics on the USA market available online.

I´ll just give you two graphs in this post though, one which shows the inventory in Orlando over the last 3 years and other which shows new contracts issued in Orlando during the same period. (Source: Orlando Realtor Association)

Off the top of my head, I can think of half a dozen Housing Ministers in Europe and elsewhere that would sell their grannies for stats like these.

 

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Warm Regards

Colin

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