The Investment Scientist

Fix-Up and Tear-Down Investment Property

Posted on: November 6, 2012

house for sale

House for sale

Last week, my wife found another fabulous piece of real estate to invest in. It is a two bedroom/one bath bungalow. It is a 10-minute walk from a metro (subway) station and 15-minute walk from lots of amenities.

It is a short sale; the bank-approved asking price is only $155k.  The land is about 0.3 acres adjacent to a park and is worth more than the entire asking price.

It is a very interesting investment decision for us. Let me list the pros and cons.

The pros are many and include:

  1. The proximity to metro and shopping
  2. The land.
  3. Just one block away, there is a whole section where half-million-dollar houses have been built.
  4. Two houses down the street, a new house was built and listed for $550k.

The cons include:

  1. The house itself was built around 90 years ago, and it looks like it has not been maintained.
  2. The neighborhood is apparently low income with many houses in disrepair.

Even if we fix it up, which could cost us $30k to $50k, we probably won’t be able to rent it for more than $1500 a month. But at the rate new and expensive houses are being built, in five to ten years, it will be surrounded by half-million-dollar houses left and right. At that time, we would have the option to tear it down and rebuild.

We estimate it would cost us about $250k to rebuild from ground up. If we sell it for $550k, we will still get about $100k profit on top of the rental income.

We submitted an offer with an aggressive offer: asking price with $1,000 escalating til $175k. In other word, if there are better offer than us, you will up our offer by adding $1000 to the best offer until $175k.

We did not win the house since there are four other offers concurrent with us. What’s the point of writing about it, then? Well, it was fun to go through the mental exercise of investing.

Also, there is an old Chinese saying: when you see the first green leaf, you should know spring is coming. The fact that there were so many offers for the house shows me the real estate market is finally on the mend.

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3 Responses to "Fix-Up and Tear-Down Investment Property"

The other point is not every offer makes a contract. Multiple investors see differing opportunites through their indvidual points of view. This is where the investor needs to rely on his business/investment model. That model sets the criteria for your properties. If an investment will not do what you want it to do, after bidding, it’s better to lose the bid and seek a property that fit’s your model.

In real estate we can tailor the outcome for the needs of our personal situation. If you make lots of money and need to shelter it from tax, RE can do that. At the other end of the continuem, if you need monthly income for retirement your model can be tweeked in that direction.

These days, even a 100% equity position in a property can translate to a 10-12% ROI in cashflow. It’s more liquid than a CD and less volitile than trading.

With this caveat: Spend a lot of time putting together your model and search criteria, then stick to the plan you built for yourself. Repetition of the model clarifies probable cost and outcomes before you even offer. You learn how much material and time it wil take to do one of your projects.

On the other hand, If in 2 years you have done 1 condo, 1 ranch, 1 two story, and 1 twin single; you have accomplished a lot but the costing and rent potential is all over the place.

We just finished our 9th property. We started in the fall of 2009. We were not seasoned RE investors. Translation, banks wouldn’t touch us. We had prior business experience and built a model that continues to work for us. One very important thing we did. We found a person in our market that knew how to build this kind of portfolio. Books are great, seminars are OK, a guy on the team that knows how is invaluable. My theory was if you want to become wealthy learn from someone that has done it. Most metros have a RIC (real estate invetment club). They have meetings, share thoughts, offer help, sometimes even have properties to sell. Most important, they are in your market.

Investment in real estate today is only for those people with money to smoke like cigars. The city which I live in builders are hand i glove with politicians and bureaucrats, property is bought by people from big cities, a person who wants a home is neither able to afford one unless he hits jackpot lottery with is average income of Rs7000/- or Rs 8000/-

If you know about real estate, Please visit this website.

I would argue that a young couple with little resources can get into the RE investment game, perhaps easier that the guy with some cash. Here’s why. HUD and Fannie Mae make special exceptions to Owner Occupants. As an investment, I personally want my properties in a nice neighborhood. Because of that, we don’t invest in inner city urban renewal areas. So, the young couple buys their first home from HUD or Fannie Mae (Homepath) in a nice area. They work on it while they live there. Fix the big stuff, decorate to their style. In a couple of years they do it again. The result is they now have a rental, with a 3%+- mortgage putting money in there pocket each month, and another project to live in and work on. If they do that 4-5 over the next ten years, they will have well over a million dollars in real estate assets, all with favorable fixed low interest financing. Each rental putting spendable cash into their pockect, while the residedents service the debt and increase the investors equity each month. We all want to wealthy by the end of business hours today, but sometimes you have let time do what it does.

A genereation ago my In-laws were devastated by the medical bills revolving around a child with cancer. In there middle aged years the bought, live in, fixed up, and sold several houses. Enough that by retirement they could not spend the cash they had amassed. Were they Donald Trump? No. They were the millionares next door.

In a few cycles, that young couple starting with an Owner Occupied HUD or Homepath could have their choice of either a pile of cash, a string of income properties earning enough to pay all their monthly bills, or they could have put the cash into their domicile and have a very nice place, free and clear.
It works just like your first saving account. When you made the first deposit, it didn’t have the same result as when you made the last deposit after a lifetime of saving.

It is sometimes true that the really big, really good deals are obsorbed by those with connections. It is equally true, at the end of the baseball season more games are won by base hits than home runs.

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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