This is my column for this week from the Arizona Republic (permanent link).
Buy low? Sell high? You can’t sell high for now, but prices are low enough that a buy-and-hold strategy could pay off handsomely
Last week 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 hasn’t yet been a landlord.
With new investors, I talk about premium suburban single-family rental homes. This is normally the safest, most economical way to start a real estate investment plan in Phoenix. That’s especially true right now, when the right rental home will be cash-flow positive from the outset.
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. There never was heard a more discouraging word, but flipping has a horrible reputation because a horde of TV-educated 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. Hold it in that state — with the monthly cash-flow covering your costs — until prices recover to your satisfaction. Then do the refurb and sell.
Here’s another one: 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 and take the capital gain tax free.
There is a common investment idea behind 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 residence, you can afford to wait for the market to turn.
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Wayne Long says:
Greg – I think you are exactly right. Buy a flip but hold it as a long term investment. Complete the flip when prices recover. This is a strong investment strategy right now.
August 23, 2008 — 7:17 am
Mortgage Samson says:
Greg, those are some great strategies right now. The only caveat I would add to this market is that there are many prospective tenants that are taking advantage of the market right now, so some due dilligence on the tenant has never been more important than right now.
Beware of the 3 t’s of rental property:
Tenants, Toilets, and Trash
August 23, 2008 — 11:16 am
Joe Manausa - Tallahassee Real Estate says:
Greg, I agree with you that most real estate strategies are back in play now with prices so low and interest rates at a level that we might not get to enjoy much longer.
I personally favor the buy and hold strategy. Use fair leverage, turn it over to a great property manager, and ten years from now you’ll look like a genius. That is my message to investors today, and has been for the past 17 years. As you mentioned, the TV show “flipping” mentality has hurt an investment vehicle that has served generations for many years.
Keep up the great work. I will keep enjoying your blog from afar….
August 23, 2008 — 12:05 pm
Louis Cammarosano says:
It seems that perhaps there will be a return to the original concept of home ownership.
Primarily its a place to live, get a tax break and over time make money.
August 23, 2008 — 8:21 pm
James Boyer South Orange NJ says:
Exactly Greg,
I have been a flipper and have worked with flippers and now is a great time to be doing several of the strategies you talked about.
Currently in my area, the only homes that seem to sell are those that are fully updated and basically in move in condition. If you can find a home where the seller is willing to sell for what the home is really worth in its current condition, you can make a reasonable profit as a flipper.
I am also in the middle of doing the last strategy you talked about. Purchased a 1967 home which had never been updated, and we are slowly updating it as we live in it. New windows, hvac, kitchen and wood flooring so far. New deck, landscaping, driveway, roof, and bathrooms to come over the next few years.
August 24, 2008 — 11:54 am
laurie mindnich says:
It’s been a very tough thing to decide to make the leap to bank owned properties (from residential listings) but my decision has been confirmed here (thank you), and feel lucky to be able to list for banks right now. Although, their properties seem to be consuming the mainstream…investors, grab ’em. A few short years.
August 25, 2008 — 9:25 pm
Brandon says:
Maybe I missed something, but if you move into the house you’re flipping your capital gains exemption comes in two years, not five. Just pointing that out…
August 26, 2008 — 8:53 pm
Greg Swann says:
> Maybe I missed something, but if you move into the house you’re flipping your capital gains exemption comes in two years, not five.
The law changes on December 31st. The full exclusion will take 60 months. Less than that will pro-rate.
August 26, 2008 — 9:26 pm
Al Donohue | Ridgewood Real Estate Guy says:
Greg – Good insight and solid advice. I just finished reading two books on investing in income properties but for the life of me I cannot get the Math to work. Even in this market, there does not seem to be a single one-family home in my town that would throw off enough income to cover the expenses – not one. There are only a few that would cover the mortgage payment and none that would cover mortgage payment + taxes + expenses. Would you invest in something that is slightly cash flow negative right now if you felt that when the market rebounded you could sell it for a large enough profit that it would more than make up for the small monthly hit you would need to take until you sold the property?
August 31, 2008 — 7:43 am