Three Thoughts: Flip it or rent it out?
| Wednesday, Sep 21 2011 01:27 PM
Last Updated Wednesday, Sep 21 2011 01:28 PM
Disheartening though the housing bust has been for many former homeowners, market conditions have created opportunity for investors with access to cash. But risk remains even for them. Difficult decisions must be made about whether to buy and hold or buy and get out quickly.
Our question: Are wise investors flipping local residential properties, or renting them out?
Responses may have been edited for clarity or length.
Wise investors realize that the market is great and now is a good time to buy. Here at Citywide Property Management, just in the last few days we have had investors calling and asking what rents are for the properties they are thinking of purchasing.
I see on the local MLS (multiple listing service) that many people have purchased and flipped their properties, and that homes under $50,000 are going like hotcakes; with a little fix-up, they rent quickly. This is true not just for single family homes but duplexes and up to fourplexes. In fact, a fourplex in the southwest was just listed for $120,000 -- what a deal! Proper attention, maintenance and tenant screening will rent that up!
The ever increasing number of foreclosures helps investors rent their properties to those who just lost their homes. Previous owners make good renters and usually can rent the same type home for less than they were paying on a mortgage. Demand for residential rental properties has kept rental prices stable enough to create a positive cash flow along with low interest rates.
I think wise investors know that in this great market we have, now is the time to purchase, rent and hold until the market turns. Real estate is always a wise investment.
-- Pamela Fein, office manager, Citywide Property Management Inc.
The current climate, as relates to my business, has many investors looking to purchase, renovate and hold foreclosed properties. Many are enjoying a positive cash flow by renting properties in their portfolio. Some investment groups and individuals are purchasing properties in bulk from lenders to renovate and resell for a profit. We are also seeing activity by first or second time buyers of primary residences.
Property prices are well below those of the early to mid-2000s, so individuals' purchasing power has expanded exponentially. As we say, they can now get more "bang for their buck."
Many of the lenders will prefer to sell their foreclosures "as-is" and "all cash," so as not to have to deal with the requirements of bringing the subject up to minimum property standards as stipulated by loan/lender/investor program guidelines. With that in mind, I find that many of the FHA, VA or maximum conventional loan guidelines will eliminate families who are cash poor but credit rich.
I always inform my buyers who I know will be competing with everything from "all cash" investors, portfolio investors and other primary homebuyers that it is the decision of the bank/investor/owner of the property, and that all must be prepared for disappointment.
-- Nance Fillmore, owner/broker of Fillmore Realty & Financial Services
The operative word in the question is "wise." There is a small group of investors who possess the necessary capital to purchase foreclosures, renovate them and then resell them for a legitimate profit. Accomplishing this requires significant liquid capital, as the foreclosures must be purchased for cash, there must be renovation crews in place, and then the properties must be marketed. The investors must perform significant research before deciding to purchase a foreclosure. My research indicates that their typical profit ranges from 10 percent to 20 percent, which is fair given the risk they are taking.
There is another segment of investors who purchase homes, renovate them and rent them out in hopes of realizing profits if and when the market recovers. They, too, provide a valuable service in providing housing to the many families that have lost their home to foreclosure. However, these investors face risk with tenants who tend not to take care of the property as would a homeowner. Also, it has been reported that government-sponsored enterprises such as Fannie Mae and Freddie Mac now have more than 220,000 homes in inventory, and that they are considering renting them out instead of selling them. If that happens, the rental market may be in oversupply, thus lowering rents and increasing risk.
-- Gary Crabtree, real estate appraiser and owner, Affiliated Appraisers
