Buying Investment Property – Making money on the way in

 - Paul Sieving www.PaulSieving.com  

July 15, 2009 – The Investors are coming, the Investors are coming! Since late last year, according to the California Association of Realtors®, buying activity by investors has been on the upswing in many California markets that have been hard hit by the recent correction in the housing market.  

During the peak of the boom in 2004-2005, there was a rush by investors to buy, upgrade (cosmetically or marginally) and re-sell properties during the steep price appreciation that existed then. “Fluff and Flip” was the business model of the day, driven by pricing momentum. There was a steep decline in this type of investment activity as the market softened and pricing momentum reversed, wiping out the upside for many who were late to the party. 

Today, many market analysts agree that we are at or near a bottom and that the eventual recovery in prices will be slow and easy, as tight credit puts a leash on exuberance. During this period, the market will also need to purge itself of the distressed properties that have driven the continuing decline in prices. These distressed properties (short sales and REO) represent opportunities for investment that aren’t as glamorous as the upward pricing momentum of a few years ago, but instead rely on solid investment principles that provide good returns in any market. 

There is still some opportunity in “flipping” in the current market, but it takes a commitment to much more than “fluffing” in order to be successful. Many distressed properties are in poor repair, have been stripped or vandalized or neglected over long periods. The opportunity here is for investors with the ability to cost-effectively identify and remedy these problems with quality repairs/remodels, taking advantage of the “dual market” where the truly trashed properties sell at a significant discount to properties in good repair. The successful investor in this market will analyze the opportunity before acquiring, to determine if the purchase discount is wide enough to allow a profitable turn of the property. 

Another investment principle that stands the test of time is investing for income. In this case, long-term cash flow is the criteria, rather than appreciation. Whether the target property is residential (single-family, duplex, fourplex, apartment complex) or commercial, the same basic principles of investment analysis apply. 

It is important to analyze the opportunity in terms of return on investment, rate of return, leverage and many other factors, in order to determine if the property meets investment objectives, prior to purchase. Often, a shrewd investor will see opportunities to improve the performance of a target property with changes in the way it is managed, adding to the upside potential of the investment. 

For investment success that stands the test of time and is largely independent of market cycles, “analyze and acquire” will outperform “fluff and flip” anytime. The key is taking the time to be sure you are making money on the way in, rather than speculating on making money on the way out. Any appreciation in price is just a bonus in this case.