In Atlanta the hyperactive flipping mentality of the 1990’s and 2000’s—involving investment properties—has subsided, however a new breed of investors are on the scene. In the current market there are those who invest on the sidelines and wealthy investors who utilize real estate brokers to purchase property for them and possibly manage the properties.
By purchasing distressed properties investors may be profiting from the misfortune of others, but many are also preventing foreclosure, enhancing neighborhoods and communities, and stabilizing local communities.
Many investors are using the buy low and sell high strategy to purchase investment properties—however, it is not the same strategy that investors used before the great recession. Current investors realize that they may have to hang on to the properties for years in order to get the return they desire.
Many buy low paying all cash, make 10 to 15 thousand dollars in repairs and upgrades to the property and then lease them to tenants where they clear then attempt to recoup their investment in the property—prior to selling at a later date—and ideally for a large profit.
For example, if you buy a house for $30,000 cash and invest $10,000 and then lease the property for four years you would have recouped your investment and could now sell and make a large profit if the real estate market was to have an "upturn" to a level that you were comfortable with.
If the current real estate market was not at a level that you were comfortable with you would continue to lease the investment property—and at this point you would be making a return on your investment as your total cash outlay would have been recovered at this point.
Let’s say the market did not improve to your liking for another four years (8 years total from the time of your purchase), you would then have over $40,000 in net profit or a return of 100% or more based on your $40,000 purchase.
Another way of looking at it is that you spent $40,000 in total cash outlay and over an 8 year period you got your initial investment of $40,000 back—plus you made an additional $40,000 or more—and you still would own the property.
If at this time the market has changed to your liking and you decide to sell for $100,000 you would have a gain of $60,000 on the sale of the investment property—not withstanding your adjusted basis and selling expenses. Your total gain would be $100,000—lease income of $40,000 or more and a gain on sale of $60,000.
Another way of looking at it is you invested $40,000 and after 8 years you would have a gain of $100,000 or a substantial return. It took you 8 years to more than double your money which is hard to do with many other investments.
If you multiply this by 10 you could theoretically use $400,000 and in 8 years you could have gains in excess of one million dollars.
Many current investors are using this strategy on investment properties—or a variant of it—in an attempt to improve their financial position. Many with excess cash are jumping in and putting all of their eggs in one basket with no regard for their total financial situation.
Many are not financially savvy enough to know that their finances are out of balance and they are investing too heavily in real estate at the expense of their other long-term goals and objectives.
If investor calculations about the future real estate market are wrong they should be in a financial position to hold the property for a longer duration than they initially planned.
Many Atlanta neighborhoods are learning to live with foreclosed houses that are owned by absentee landlords because they see it as a good alternative to a neighborhood eyesore that tends to attract unwanted behavior.
If you decide to go this route be sure you understand the true value of the property(s) you are considering, the cost of renovations, the characteristics of the neighborhood, and how long your money is likely to be tied up as this is a highly illiquid strategy and if you will need the money in a relatively short period this type of investing is not for you.
By purchasing a property at this time you as an investor are betting that the market has bottomed out or is at least close to bottoming out. With the current economy that is no sure bet, however if your bet is correct you could see substantial future gains.
The key is you must properly value the house on the front end at the time of purchase. The years when properties in Atlanta rose 10% or more a year are over—which means you may have to hang on to the property for a while.
Also have a solid renovation, tenant selection, and landlord (property management) process in place prior to purchasing your investment property and be sure you know your cash outlay for each.
Also keep in mind that foreclosures account for every 1 in 3 sales in metro Atlanta and if that trend continues it will be a while before the market bottoms out and an upward housing price trend materializes.
With so many foreclosures Atlanta is ripe for International Investors and they have been buying Atlanta area homes in large numbers as of the Spring of 2011. Many are attracted to Atlanta due to the large number of foreclosures, past population growth in the area since the 1996 Olympics, and the stable rental market.
Other international and local investors in metro Atlanta are buying foreclosed and distressed properties in highly desirable school districts and areas such as Alpharetta, Milton, Johns Creek, Sandy Springs, East Cobb, and North Gwinnett for cash and then fixing them up and reselling them for a quick 20% or so profit.
Let’s say you buy at $50,000 and do $20,000 in renovations and turn around and sell the property for $100,000 with a 6% commission going to the real estate agents—you would net $24,000—a greater than 20% ($24,000) gain in a matter of months if you were successful.
Whether you decide to invest for rental income and eventual resell years down the line or buy to renovate and turn a quick profit it is imperative that you are in position to invest properly and are not putting yourself or your family at risk.
That means you must have a properly funded emergency fund as well being in a positive financial position and have insurance, investments, taxes, education planning, estate planning/wills, and retirement planning addressed at an acceptable level for you and your family.
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About This Article:
The above article was written by Thomas (TJ) Underwood. Thomas (TJ) Underwood is a former fee-only financial planner, a former top producing loan processor and is currently a licensed real estate broker in the state of Georgia.
He is the writer behind The Real Estate & Finance 360 Degrees Series of Books that include The Wealth Increaser, Home Buyer 411 The Smart Guide to Buying Your Home, Home Seller 411 The Smart Guide to Selling Your Home, and Managing & Improving Your Credit & Finances for this MILLENNIUM.
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