Washington DC

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. 

Investing without Emotions

In recent weeks, we have been on the losing end of two transactions. First, we tried to acquire a multifamily investment property in Columbia Heights and then we went after a full-gut rehab project in Capitol Hill. In both cases, our offers were substantially over the asking price - $60k over for the multifamily investment property and $70k over for the rehab project. We visited each property multiple times, did our due diligence, walked both of them with our General Contractor, discussed renovation plans and more importantly waived all contingencies including financing and inspection. We knew there was going to be a lot of interest on these deals and didn't want to miss the opportunity; so our offers were best and final. We were initially given positive feedback by the agents and were feeling good until they stopped returning our calls or texts and eventually hit us with the famous "even though your offer had the best terms, the seller has decided to go with another higher dollar offer"....not a good feeling, I'll tell ya! We later found out that the investment property had six offers and the rehab property received 16 offers....talk about a HOT market!

Losing on a real estate deal is nothing new and is part of the business, but this is a good reminder on how competitive and frustrating real estate inside the District has become these days. Hindsight is 20-20 but we lost on these deals because we didn't want to pay a penny more based on our assessment of the market and more importantly the principal guidelines that we have established. I tend to look at things at a high-level and realize that this won't be the last time that we lose on a deal but it gets really exhausting after a while and I have to keep reminding myself that this is the way things are and we just have to be that much more diligent and tenacious in our investing. 

The entire process of acquiring a property is not only time-consuming but it also requires a tough mental and emotional adjustments with respect to principal investment guidelines. Warren Buffett once said "it is an easy game if you can control your emotions" and that saying is very true in real estate investing. Good investing doesn't require an in-depth proforma analysis or analyzing macroeconomic conditions but controlling your emotions, however, is very, very difficult. When people get their emotions involved, they do things that they shouldn't do and end up in trouble. My partner and I were very excited about each one of these deals and it would've been very easy for us to escalate our offers higher to ensure that we win them both but that would've come at the expense of disregarding our investment guidelines and the type of returns and profits that we intend to achieve on each one of our deals. 

We are still bullish on the real estate market in DC long-term and will go after more investment opportunities in 2017 but will only do so if they make complete sense. This means we will have fewer options but I am willing to take that risk knowing that our investments were made on principal guidelines without any emotional attachments. 

Construction Update: 709 Hamilton Street, NW

Things are moving quickly at 709 Hamilton Street, NW property. Our construction crew have been working hard to bring this property to market and we are now at the halfway mark of completion. As of now; we have completed demo, interior framing, exterior painting, front porch installation, parking pad, fences, all new sidings, new roof, masonry and mechanical (all new HVAC, plumping and electrical) rough in. We are expecting an inspection to be done this week and drywall/painting and floor installations to follow next week.  Our designer has started selecting bathroom and kitchen finishes and we can not wait to see how things turn out.  Check back in a couple of weeks for more updates. 

 

The New DCBuySell

Since Jason and I started the company in 2014, we've been seeking to find our niche and voice in this crowded space. We've done everything from completing our own development projects, wholesaling properties to other developers, and exploring various joint venture opportunities. But, what started as a way for us to engage with the community and sort of a hobby, is starting to get bigger and have to adopt. So we've been doing some soul-searching over the past few months. We asked ourselves "what is the big mission?" what is it that is going to set us apart from others? It turns out the answer was right in front of us. We want to be known for more than just a development company and become a full scale real estate agency that is also focused on sales and marketing in addition to developments. That is because; we believe that all of these elements go hand in hand and there is absolutely a need in today's market that will make our services unique to home buyers/sellers, other agents, developers and other partners. 

Of course a new identity is more than just a blog post. So we've redesigned our logo and the entire website to better reflect our new mission and services offered. We will be using this website as a platform to showcase new development projects, featured listings and everything related to DC's real estate market. You will see us become much more active in the market and continue growing our services. 

The past 18 months has been fun, exciting and challenging at times. We are grateful to have met and inspired by many that are doing amazing things in our community and look forward to starting the next chapter of this journey with all of you. 

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.