Give me your money, Part II: Emergent investment opportunities in the recovering real estate market

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

Last Tuesday I met with a potential real estate investor. She’s an investor because she’s got the money, the credit and the will to dip her toe in the water. She’s a potential investor because she has never yet been a landlord. That’s okay. I’ve worked with many potential investors, some of whom have gone on to own multiple properties, most of those — not all, alas — very successfully.

Mostly when I do these kinds of interviews, I talk about premium suburban single-family rental homes. This is normally the safest and most economical way to start a real estate investment plan in Phoenix. This is especially true right now, when the right rental home will be cash-flow positive from day one. Our rents are low but stable, and our home prices can be very low right now.

But I also talk about other income opportunities in real estate, if only because land-lording is not for everyone. I would not advise a first-time investor to take the plunge in a large multi-family community or a strip mall, but there are plenty of other ways to take advantage of our current market conditions.

An example? Flipping. Never was heard a more discouraging word right now, but flipping has a horrible reputation because ten bazillion TV-tycoons bought at the top of the market and sold their refurbished masterpieces at auction. Now, when entry prices are low and trending lower, a slow flipping strategy promises nice rewards.

Here’s one slow strategy: Find a great flip candidate at a rock-bottom price. Buy it to own as a rental, doing what you have to on the way in to make it marketable as a rental. Hold it in that state — with the monthly cash-flow covering your costs — until prices recover to your satisfaction. When the tenant’s lease expires, do the refurb and sell.

Here’s another one, a strategy that worked very well from 1997 to 2006: Buy your cheap refurb candidate and move into it. Redo the home slowly, room by room, especially when the materials for doing a particular room are very cheap. Sell it after you’ve owned it for five years or more. Take the remodeling costs off your basis and take the capital gain tax free.

There is a common investment idea behind both of these strategies: Buy low. Sell high. You can’t predict when you’ll be able to sell high, but you know for sure you can buy low right now. If the investment property is either self-amortizing or your own domicile, you can afford to wait for the market to turn.

Here’s a idea that makes me nuts:

That’s a small apartment community in Phoenix as seen by satellite. There are dozens of these in Central Phoenix, maybe hundreds. The way they work is a series of small structures is built around a common park-like courtyard, with the community pool in the middle. Most Phoenicians like single-family homes. Bigger apartment communities, with more community facilities, can appeal to younger people. But these little courtyard apartments are heaven on earth to a certain slice of the Phoenix demographic.

Why do they make me nuts? Because they’re the perfect small-investor urban redevelopment project. If you were to buy one of these communities, you could own it as a rental property until the youngest of the leases expires — or until prices improve. Then you could vacate and refurbish the whole place at once, converting small dowdy apartments into small in-town luxury condominiums.

Your market: Singles, empty-nesters, frequent out-of-town visitors, etc. Phoenix is undergoing an urban revival of sorts, but there is a limit to how far people are willing to stretch from this town’s cowboy-suburb roots. This kind of property represents a nice compromise between single-family living and the shared costs of a condominium plat.

Need a financing plan? Put 20% down and get the seller to carry back a note. Even better, get an investor to put the 20% down, and get another investor to commit to the refurbishing costs. As the Executive Partner, you have nothing committed but your ideas and your time. An even better way: Partner directly with the seller, getting him to put you on title. Borrow against the property to pay for the refurb. You handle the ideas, the execution and the marketing, and you split the proceeds. Either way, get the legal work done while you’re waiting out the market. The property can be a condominium regime long before the tenants know anything is up.

Here’s an even more ambitious plan. Because we work so much in the historic districts of Phoenix, we have a pretty good feel for which undervalued neighborhoods have the best potential for future revitalization. There is one neighborhood in Downtown Phoenix that makes me continuously crazy.

Why? Because it’s small enough that a concerted effort by a small group of investors could make a dramatic difference in home prices virtually overnight.

What I’m talking about is what people back east call a slum. Old, run-down houses owned by the most sclerotic kind of investors, who charge ridiculously low rents to people who may or may not be able to document their lawful residence in the United States. But where old, run-down houses are common back east, here they are rare, and, in the right circumstances, highly valued.

Here’s how this strategy works: A dozen or more investors go into the neighborhood and buy up properties one by one. This might work best as a buy-and-hold, as above, to wait for the market to recover. The homes can be had very cheaply, in any case. Once we’re ready to start, we move the tenants out and begin the refurbishing. We talk to the owner-occupant neighbors, telling them what we’re doing and offering them advice about remodeling they can do to keep pace with the neighborhood.

At the end of a year, we will have refurbished more than 20% of the homes in the neighborhood, turning them into the kind of high-value luxury historics that urban homesteaders love. With luck, we will have bought a dozen more homes for a second wave of refurbs. By the end of the third year, we will have turned the neighborhood completely around, creating by sheer force of will a brand new high-priced historic enclave in Phoenix.

Now the point of this post is not to actually get you to bring your money to Phoenix so I can invest it for you — although if you want to do that, I have a lot of other cool ideas.

But my point is this: All over America, real estate is selling for historic low prices. That’s sad for the people who lost what they had, and sad for their banks and their banks’ investors. But there are huge opportunities waiting for people with sense enough to dry their tears and get to work.

You can buy low right now. You can’t sell high now, but the market will turn. If you can buy and hold properties now, you can refurbish and sell them later at very nice profits. I can drive you through Phoenix and show you one opportunity after another. I’m sure you can do this, too, in your own town. If you have the money to invest yourself, so much the better. If not, start accumulating teams of investors and contractors and start working out game plans.

It’s raining soup, as always. It’s time to get out in the world and bring home some dinner.

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