Anyone looking for ways to increase their investment income in the current recession might do well to consider the recent words of Florida Gov. Charlie Crist, who has recommended that more of the Florida retirement pension funds be invested in Florida residential real estate. If it is good enough for the state is it good enough for the resident of the state as well?
The key element in any investment, of course, is finding a way that what you make exceeds what you are likely to lose. Or, there are real estate investments and then there are real estate investments. So how do you choose and how do you decide if real estate is right for you.
Florida, for example, has recently suffered losses in a $250 million Manhattan real estate investment that failed. And yet, the Governor is recommending investing in Florida residential real estate.
It’s a great idea for the right people and the reason it is a great idea now is timing and the really big reason is that real estate investing is not “fungible.”
Let’s look at the issue of timing first and then get to fungibility. In many cases Florida residential real estate is selling for half of what it would have fetched at the peak of the market. So by definition, if you buy today you have only half as much to lose.
If the price of a single family home in Florida were to be considered like a stock, you would start to see a small number of people speculating whether “we have seen the bottom of the market.” That kind of guessing is popular in stock market investing. And it may be right. We may be at or near the bottom. And again we may have farther to go and prices will become lower.
If you are in stocks you have to pick the right time to buy and you only make money if the market goes up. Sounds reasonable. We all are familiar with this idea. If you do not already know, it may be difficult to understand that in real estate you can, at this time, make money after you buy if the market goes down.
That’s where the similarity of real estate prices and stock prices go their separate ways. If you want to buy shares in Google or IBM you will pay the current market price because stocks are fungible. That means that all shares of IBM common stock are the same and all sell for the same price at the same time.
Stock prices may go up and down but on any given second of the trading day, there is only one value for the shares of any stock. This is not true in real estate and it gives the opportunity for greater profit and less risk.
While the general real estate market in Florida is down around half of the value of the market peak, there are individual houses that currently are even cheaper. In some cases, I am finding homes that can be bought for half (sometimes less) of the current value. So let’s say that homes in Pasco County are down 50 per cent and some individual homes in that large market basket can be purchased for about 25 per cent of what they would have sold for at the top.
Would you think that these properties offer less risk and more potential appreciation? You would and you would be right, with certain cautions.
The houses that are available at the bargain basement prices are in most cases damaged, sometimes substantially, are properties owned by banks who have foreclosed on mortgages, or are owned by a variety of others who have a powerful need to sell now and get on with their lives.
One of the cautions certainly would be that you need to get someone who is qualified to tell you how much it will take to repair the house so that it will sell for the going rate and not a discount. The second risk is that if you want to make that investment and you have never rehabilitated a house, you have a learning curve ahead of you. Simply, while this sounds like a great idea, it is not for everyone.
You should also know that the state government has passed legislation limiting how you can buy certain of the houses where the value is or could be distressed. Buying a house in foreclosure where the owner is still living in the house requires specific forms and disclosures and failure to comply carries the risk of substantial fines.
Fortunately there are other ways of participating in this part of the current real estate market. Many professionals who rehab houses are looking for partners with money to finance their rehab of a property. Frequently the arrangement calls for spitting the profits 50 per cent to the person with the money and 50 per cent to the person who provided the money.
In two decades in this market, I have seen investors make incredible returns on their money and in some cases financing the same home rehabber time after time with both parties happy. I have also seen an almost endless array of potential problems become real problems and both parties wind up losing money on this type of deal.
I am not saying that it is a bad idea to do this type of investing, but suggest that the investor and rehabber both should thoroughly vet each other, have a clear precise contract explaining who does what and spelling out as many possibilities as is possible. If done right, especially now, buying below the market and knowing what you are doing, should product decent real estate profits. The potential of loss is of course always there. The property could be on a toxic waste site, have liens or encumbrances that the rehabber did not know about at first and a variety of other potential problems.
Another approach to the issue of how to invest in Florida residential real estate would be for the investor to let the rehabber complete the house using the rehabbers own money and skill and then simply take a mortgage on the property after the work is done and a renter is in the house. This type of investing will probably only yield 7% to 12% a year in the current economy compared to 40% or more return in less than a year for the partnership investment where investor and rehabber are sharing the total profit and the risk.
The second article in this series details a case study of the first house I rehabbed and then financed with an investor. The investor was a mortgage broker I had used for loans to put some of my buyers in houses and she came up with the idea of financing a house I had rehabbed in Clearwater Fl Two decades ago.