Build Your Real Estate Portfolio
Build Your Real Estate Portfolio
Whether they’re saving for retirement, their children’s education, or a rainy day, real estate professionals are also real estate investors. According to the 2001 NAR Member Profile, 39 percent of respondents owned rental property as part of their investment plans. After all, says Bill Watson, head of the 38-office Watson Realty Corp., headquartered in Jacksonville, Fla., “who are better equipped to buy real estate than those in the business?”
Today Watson owns 150-plus single-family homes, along with three apartment buildings and many offices. The company’s guaranteed sales program is a major source of investment for Watson. He personally buys properties at 85 percent of market value when no offer is received for a listing or when the buyers fail to qualify for a loan. Because Watson holds properties for the long term, he prefers newer, masonry properties whose maintenance and replacement costs will be minimal. “And I won’t buy a house with a pool,” he says, “because the liability and the maintenance costs are too high.”
Keeping an eye on the market is by far the most frequent way real estate professionals find the properties they buy. “After 18 years, the deals come to me,” says Tom Christensen, broker of the one-person Christensen Co., Madison, Wis.
Christensen looks for “underrented, underdeveloped properties” where he can use his experience as a general contractor to estimate the added value of renovations or additions. On one recent investment, he spent $800 to convert a property’s second living room to a third bedroom, adding $15,000 to the rental property’s value. “I also look for properties with bad roofs,” he says. “It’s a sign the owner has lost interest or is short of money and might be interested in selling.”
Zablotny, another one-person office, also looks for below-market rents as a good indicator of investment potential in the small multifamily properties he favors. “Often individual owners are reluctant to raise rents, so they may be 25 percent below market for the neighborhood,” he says. “If I can roll the rents in six months to a year, the investment has strong potential for double-digit cash flows.” Zablotny does a lot of due diligence on his investments, with multiple inspectors evaluating roofs, boilers, and electrical equipment. “It’s particularly important with an absentee landlord, who may not even know about some of the property’s problems,” he says.
“You can’t let pride of ownership blind you; sometimes the best-looking properties aren’t the best investments,” says J.T. Purvis, owner of three Arizona real estate companies, including ERA National Realty of Arizona in Prescott. “People aren’t creative in looking at a property; they should look for flexibility and adaptability.” Before closing a sale, Purvis uses off-the-shelf lease analysis software to evaluate the net present value of future rents and does such standard due diligence procedures as environmental inspections, competitive market analyses, and appraisals.
Like most broker-investors, Purvis got his start buying single-family homes or duplexes, but he switched to commercial buildings because “I didn’t get plumbing calls at 2 a.m.” He likes the longer leases and less intensive management of commercial space, but he still believes buying homes is the best way to get started as an investor. “The risks are less because homes are less expensive, it’s easier to find a replacement tenant, and people will always need a place to live.” Today he’s helping his daughter and son-in-law buy their first rental property.
Current laws that allow single homeowners to avoid taxes on up to $250,000 and married couples up to $500,000 of capital gains on a property they’ve lived in for two years are a big factor in Eric Goosen’s real estate investment strategy. “When I buy a two- to four-unit rental property, I can put down 10 percent and borrow up to 90 percent as an owner-occupant. And I don’t mind moving every two years.” As broker of the seven-person Goosen Realty Services in St. Clair Shores, Mich., he finds his investments by “being out in the market, looking at the MLS every day, and actively pursuing FSBOs.” Having the opportunity to see properties when they first come on the market has helped him build his holdings to $855,000 in the nine years he’s been investing.
Having the confidence to make a quick decision has also been critical for investing in a tight market, says Goosen. “I’ve bought properties I’ve never been inside.” He relies on his knowledge of the market and a quick outside inspection. “If you see cracks in the foundation or crumbling brickwork, you can guess that the inside is in similar shape,” he says. When Goosen calculates his costs, he assumes that the properties will “need everything--paint, carpeting, plumbing, and electrical equipment.” He also factors in a 10 percent margin of error “in case something happens.”
Although most investors favor properties that require limited renovation, a few gravitate toward higher reward--and potentially higher risk--investments. Buying foreclosed and preforeclosed properties has become a lucrative investment niche for Ray “Bear” Thomas, an associate broker with John Hall and Associates Inc., Phoenix. Thomas has tried direct mail solicitations and working through bankruptcy attorneys to locate properties, but he finds that scanning the newspaper for upcoming trustee sales and then immediately contacting the troubled owners is his most successful tactic. “The market is so competitive it’s a speed game,” he says.
When Thomas reaches potential sellers, he offers several options: showing them how to reinstate their mortgages (which in Arizona can often be done for a few thousand dollars), listing and selling the property before foreclosure, or buying the property from them before the trustee sale. “If owners sell their property before the sale, they avoid the stigma of a foreclosure on their credit and often walk away with some cash,” he says. Thomas uses his skills as a certified home inspector and former redeveloper of affordable housing to determine whether the combined costs of acquisition and renovation will produce his 20 percent profit goal. “Only about half the houses I look at qualify,” he says. “If someone has owned the house for only a few years and has a 125 percent mortgage, there isn’t enough equity to give us the spread we need. If you can buy the property for only 10 percent below market, that’s not an investment house.”
Another risky business development is fueling the 15-year retirement plan of Billy and GiGi Burk of Burk Brokerage, New Orleans. “Our original plan to buy and renovate houses took an unexpected turn when the New Orleans market went flat. We felt we could use the downturn to build new properties that would be ready when the market came back,” says Burk, a civil engineer and former owners’ representative for private investors in Atlanta. The couple rely heavily on word of mouth to find properties where strong demand and reasonable land values justify new construction.
To determine the most profitable project size, Burk uses an analysis program he developed to add the cost of the land, construction, and interest charges, then applies the maximum allowable sales price per square foot and the list price ceiling for the area. But penciling out the project is only half the battle.
“Executing development can be more difficult than renovation,” says Burk. “While you may be spending months getting permits for a project, you’re paying interest and worrying that you might have to resort to a less profitable plan.”
In the final analysis, it’s the combination of hard work and hard-won market knowledge that makes real estate professionals and real estate investment such an ideal fit. “I’ve considered other investments, but single-family homes are what I know,” says Watson. “It gives you a feeling of owning a part of America.”
Balancing investment and brokerage
Successful investing is about being the first to see and seize the opportunity. Successful real estate sales is about putting the interests of the client first. Can real estate pros do both?
“You don’t want to get the reputation of selling only the ones you don’t want to buy,” cautions Tom Christensen of The Christensen Co., Madison, Wis. “For the sake of your business, you want the community to see you as a straight shooter.”
For J.T. Purvis of ERA National Realty of Arizona, Prescott, the solution is to let properties stay on the market for at least 30 days before he makes an offer: “That lets the owners see whether they can sell it at their price.” He admits to losing a few choice properties that way but says that “there are always other properties; I can’t buy them all.”
Marianne McDonough of Marianne McDonough and Associates, Williamstown, Mass., is even more cautious. Most of the older homes she buys and renovates have been on the market for a year or more. “I don’t want to create the impression that I’m taking advantage of the situation,” she says. “I’ve even helped people buy some of the homes I was interested in.” McDonough also specializes in partially finished homes or homes needing significant renovation, which would probably be too much work for the average investor.
“Another investment always comes along,” says Ken Zablotny, Metro Brokers Zablotny & Co., Littleton, Colo. “I’d rather lose the building and keep the customer.”
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