A Brief Guide To Investing And Buying Wisely In NC
Where are the deals in North Carolina??
Many folks right now are searching for a home they can get at a great price. We've all been told to search for foreclosures and short sales, even if we don't know what that exactly means. We know that we can offer any price we like on any listing, though the odds aren't in your favor if you don't put forward a strong offer in this market. But what does this all mean and where are these opportunities to make money or earn equity in real estate?
For starters, let's take a look at the current real estate landscape in the Triangle. Right now, the Raleigh-Durham-Chapel Hill area is the second-fastest-growing metropolitan area in the entire country. Low property taxes, lower cost of living, and a strong job market are bringing an average of 60-ish people per day into this area. As a result, we've got more buyers than we've ever had. Translation: if you want to buy a house, you're going to have some competition....unless you know where to look!
Disclaimer: if you're looking for a beautiful, updated, move-in-ready, recently built home in a popular part of town, there's nowhere to get a deal unless you're very, very lucky. You'll have to sacrifice location or condition typically to get immediate equity.
So, houses are going up in price. The market averaged a 6% increase over the past year, very impressive. While you can also focus your energy looking for homes where you can get a "deal", in the sense that homes further away cost less money (think - downtown $2M house vs. the same house an hour away for $250K), we are going to focus here on how to get a "deal" as defined as the opportunity to purchase a house below its current or future value in order to create positive equity in the home. After all, if you buy a home out in the sticks and get a great "deal" on it because nobody else wanted it, you will have the same problem when you try to sell it down the road.
Here are a couple of models that real estate investors look at to make money:
1) Fix and Flip: I'm sure you've seen the TV shows and rolled your eyes. No, it doesn't work like that usually. It's a lot more work and it's tough to make money if you just pay professionals to fix, upgrade, and decorate every aspect of a home. The idea is there though.....find a house that is undervalued because of its condition that you can restore to peak value. For example, a "fixer-upper" for $200,000, that'll take $50,000 to renovate, that'll be worth $280,000 when all is said and done.
Pros: Quick way to turn profit. Low costs of business if you've got cash and some construction knowhow.
Cons: Takes money to make money. If you're taking out loans for these, that takes a good bit of meat off the bones. Unforseen issues always come up during renovation projects so you've got to be able to absorb extra costs. Homes in just OK condition are still selling near their max value in this market, so it's tough to find these opportunities.
Notes: Don't go all out. You're looking to spend as little money as possible to make as much money as possible. To know what that looks like, you'll need some specific knowledge about the local market and what homes nearby are selling for and what they look like inside.
2) Rental Properties: The goal in making money on these is through the rental income. Purchase a property that you can earn money on every single month. Or, finance the property and you'll break even monthly or maybe net a little, but you'll be building equity with other people's money. Sometimes this is combined with the above strategy into a "fix and rent" model. Investors typically look for a property that rents for 10% of its value per year (for example, a $150,000 townhouse that'll rent for $15,000/yr = $1250/mo, while your monthly expenses may be around $900 or so with a mortgage.
Pros: Low-risk. Doesn't take as much cash because you're not having to eat the costs of renovation. Rentals are hot and growing, so vacancy rates are pretty low. Interest rates are low, meaning buyers can afford to finance these properties and still get some cash flow. Any appreciation of the property is just icing on top.
Cons: Low-reward. It takes a long time to build equity and earn money this way. While a fix-and-flip can make you tens of thousands in a few months, rental properties are more about collecting a variety of properties that each give you a little supplemental income while building a strong retirement portfolio. Responsible for repairs and big-ticket items for the life of the house - roof, HVAC, etc. Need to be able to budget and set aside money for these issues. Requires you parking a lot of cash for a long time versus other investment options.
Notes: What condition should I put my rental into? Depends. Most rentals are pretty basic inside, but a few minor upgrades will ensure you're always in demand.
3) Buy and hold: The goal here is appreciation. Wouldn't you have bought Google stock 20 years ago if you'd known what would happen to it? That's the mindset here. You can study patterns of real estate activity and get pretty good at knowing where development is coming, where homeowners want to live, and so forth. Many folks look at up-and-coming areas (Holly Springs and Fuquay), places where the town is redeveloping and growing (downtown Durham), places where development is planned to occur in the future (Garner, Clayton), or places that are already so developed and popular that their prices are just going to steadily rise (Cary, North Raleigh). Sometimes these properties are rented for a little more cash flow, but the focus is buying a property that will grow in equity. For example, there are neighborhoods in North Raleigh that have gone up over 10% in value just this year.
Pros: Slow and steady wins the race. Many of the world's wealthiest people built their wealth on building a strong real estate profile. Not a lot of downside here, as just about anything goes up in value over time as long as it's maintained. Tons of upside if you know how to pick winners. Easier to find properties as it's less about what it is worth now and more about its potential future value.
Cons: Long-term. Like rental properties, you won't get rich quickly. It's over time. If you don't buy smart, you'll have spent a lot of time and effort to make little to nothing in return.Notes: Read the newspaper. Look into town development plans, both short- and long-term. You can do this for your own home, you don't have to be an investor to buy a place that will go up in value by the time you're ready to sell.
4) Hard-Money Lending: Can't find a property you believe in? Get hooked in with a few savvy investors who have the know-how but are short on capital. You can finance their projects and make a quick profit turn. The going rate is 4% fee up front and 12% interest, so on average, for every $100K you loan out, you'll see $7000-$9000 in cash back on it over a couple of months.
Pros: Quick, safe, money-making. You're lending based on the viability of the investor's project. If all else fails and they default on the loan, congratulations! You now own a property!
Cons: Your money is tied up and when you get it back depends on the person you lend to. Foreclosing on a property to take the title can be an arduous process. Not as high margins as you see being the investor.
Notes: Do your homework. Know how the investor is going to make money. It takes more steps than simply giving someone money and hoping they give it back. Go through the proper channels!
Those are the most popular. In reality, the smartest investors have a working knowledge of all the different avenues so that when they see an opportunity, they can take advantage of it. As simply a one home owner, not an investor, you're still looking to get a deal...perhaps instead of selling your next house you'll rent it out. Maybe you just want to get a home that is going to make you money over time by going up in value while you live there.
So, how do you find these homes?
1) Foreclosures - "Foreclosures" technically don't exist. Foreclosure is simply the act of the bank taking back ownership of a home after the borrower defaults on their loan. This is actually referring to bank-owned properties, also known as REO (Real Estate Owned). The bank has foreclosed on the property and wants to sell it as-is very quickly to get as much money back as they can. These can be a great opportunity to get a home under its true market value.
Pros - Buy an under-priced home just because of who's selling it.
Cons - banks are notoriously hard to work with. You'll probably need cash because in most cases, the home is not in good enough condition to secure a mortgage loan. As-is, so you're on the hook for all issues and repairs.
Notes - when Zillow lists a property as a Foreclosure, they are telling you the bank has foreclosed and now owns the property. However, it may still be months or years before they try to sell it. Banks don't do anything quickly.
2) Short Sales - This is when a homeowner is trying to sell their home for less than they owe on their mortgage. Sometimes this is from the home depreciating (after the market crash), condition of the home killing its value, or someone who fell behind on their mortgage and took on a ton of fees. Once the bank has approved for this person to sell their home, they are essentially agreeing to forgive the difference between their loan balance and the selling price.
Pros - Can find great deals on homes at times. The Seller doesn't care what it sells for because either way they get nothing.
Cons - They take a long time. Banks never work quickly, so you'll be fortunate if you close within 6 months of signing a contract to buy a short sale. Just because the homeowner owes a lot doesn't mean that you're getting a home that is worth more than you buy it for. As-is, so you're on the hook for all repairs and issues.
Notes - Usually the Listing Agent can tell you if the price is pre-approved by the bank. If it is, it'll be much quicker. The homeowner must be able to demonstrate a financial hardship in order to short sell, so not just anybody can do it.
3) Hot Markets - this is for the folks searching for appreciation. Right now, lots of areas are appreciating....but it's more important to look at patterns of long-term growth, as well as what is planned in terms of future growth and development in the area. If you're looking to possibly hit the jackpot, look for a place where development will be on the way in the future. If you're looking for steady and strong growth, look where it's already very high in demand and prices have steadily risen.
4) Warming Markets - Ties into #3. If you believe a place is up-and-coming but isn't quite there yet, you can be an early buyer in at a good price, probably be able to negotiate, and know that in the future that place will be much easier to sell.
I hope this helps you or someone you know. If you're looking to get into investment models or just looking for the right deal for your home to live in, reach out! We're here to help.
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