Market Trends

Want to Invest in Real Estate? Here Are Some Tips

Not a day goes by without us speaking or hearing from someone that is looking for an investment property. After all, there is an insane amount of cash parked on the sidelines and everyone is looking for an opportunity to put their money to work. I am usually an optimistic person when it comes to investments, but my feedback to these new investors is typically along the lines of "you and everybody else." The reality is that It has become very hard, competitive and expensive to find, acquire and manage investment properties inside the District. I am not suggesting that it is impossible, but a lot of things have to align for you to find a "deal," especially if you are a new investor below a certain price range. Below are my suggestions on how to prepare and give yourself a chance. 

 

Financing - This seems like a no-brainer, but I am always surprised at how many people don't necessarily explore financing options before starting on this journey. My suggestion is to work with a local lender or a bank that specializes in commercial real estate loans and understand their rates, fees, timing and recourse requirements before getting too far in the process. I strongly recommend having the pre-qualification and proof of funds letter ready if you are serious about investing. Obviously, it is a different story if you are paying all-cash but then again, why would you pay cash if there are tax benefits to leveraging?

Search Criteria - In my opinion, as an investor, the worse thing you can do is not to have specific search criteria. Too many new investors only care about one thing: price. If I had a dollar for each time someone said to me "I just want a multifamily property for $000" I would be vacationing in my private villa out in Sardinia right now! To me, it is not enough to just to have a price target. There is a lot that makes one property a better investment option than another one and you need to know these things. Consider location, distance to public/metro transportation, the number of units, likely rent rates, zoning classifications, tenant laws, and limitations and don't waste your time chasing properties that don't meet your specific target. Because If your search is broad and all over the place then I can guarantee that some good opportunities are falling through the cracks. 

Cash Flow: Since I am in charge of financial due diligence on our investments, I typically run few different scenarios to come up with an acquisition price that makes sense for us. The most important factor to me is property's cash flow today. I don't care what the property will generate after upgrades or marketing campaigns but rather what its cash flow is today. If today's cash flow numbers make sense, then I move on to other scenarios where I consider upgrades, renovations and bringing up the property to market standards as a best case scenario. Too many new investors are chasing appreciations and speculating "this property will be worth XYZ in 5 years" which I believe is one of the reasons we got in a 2008 mess. Remember, cash is king. 

Expert Agent/Broker: This is probably the most important item as there is no substitute for what an expert agent and broker can do for you. The thing you have to understand is that agents are also operating in a very competitive space so you must align yourself with exceptional agents that go an extra level to provide services. Investment opportunities are highly relationship driven, and most amateur investors don't have access to off-market deals, financing, and 3rd party service providers. Make sure to pick an agent that specialize in investment properties within your target and someone that is vested in your success. Most agents also specialize in specific neighborhoods and could provide valuable insight into rent rolls, transaction volumes, comps and other community development projects, etc. Even though my partner is also a real-estate agent who specializes in investment properties and has his pulse on the market, we still rely on our network of agents almost on every deal. I am always amazed how effective most agents are and couldn't imagine trying to negotiate a deal without having an expert agency by our side. 

Joint-Venture: In my opinion, the best approach to getting started in real estate is to invest in series of cash-flowing properties with best-in-class sponsors. Many new investors, don't know enough about the complexities of working with sellers, structuring a deal, financing and operating investment real estate, whereas an experienced sponsor usually has the vision and knowledge relevant to sourcing and maximizing value. Obviously, do your due diligence but don't be afraid to align yourself with local sponsors with successful track records. 

DC Real Estate Market Trends

I've been spending a lot of time in recent days on Redfin to not only find deals and listings that meet our buying criteria but also to identify DC real estate market trends that we could share with our private investors. Our investors love pie charts so I decided to do a quick analysis of homes that were sold over a 90 day period in a specific zip code in DC using Redfin's selling tool.  Keep in mind that Redfin only shows those homes that hit the MLS so this may not be 100% accurate but it gives a realistic view of what is happening in DC's real estate market. Here is the criteria that I picked:

  • Zip Code: 20010
  • 90 days Period From June 30th to September 30th
  • House, Town-House & Multifamily (No Condos)
  • Maximum Sell Value of $600k

According to Redfin, there were 21 homes that matched this criteria. Out of these 21 homes sold, only 5 (23.8%) were sold at the original listed price with 12 (57.1%) selling under the listed price and 4 (19%) selling higher than the listed price.

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What this pie chart tells us is that many of the sellers (investors or individual sellers) are listing their properties at the higher end of the market value for this neighborhood and hoping that they'll get lucky given the booming state of DC's real estate market. Obviously this isn't necessarily happening and according to Redfin only 4 out of 21 homes listed officially had price reductions so many of the sellers took lower offers.

Another thing that I wanted to look at was the median list price per square foot which came up to $387. In comparison and according to Redin; the overall median list per Sqft in Washington DC over the course of the 90 days was $489 so this zip code (20010) has some catching up to do which is not really that surprising given the fact that many of the homes sold in this area are rehabs and condo conversions.

As the chart below shows the median sales price was $500k with majority of the homes selling between $500-$600k.

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The one thing that I wish Redfin would show is the number of days that each property sits on the market before it is sold.  My guess is that many of these 21 homes did not sit on the market for too long but correlating this information with the sale price could identify additional trends.

This quick study gave us some data points that we'll use to evaluate deals and share with our network but hopefully it will also help others to sell their properties faster and for more money.