Buying to Invest – A Real Life Example

real-estate

This post is dedicated to people who are interested in investing in real estate. There are many ways to invest in real estate and different strategies to do so. I’m going to give you a real world example of a property I recently visited that was going to be purchased by a client of mine – see below:

Property Specs:

  • Location: Riviera Beach, Florida
  • Type of Property: Multifamily – Duplex
  • Unit Breakdown: One 3 bed/1 bath, and One 2 bed/1 bath.
  • Asking: $89,000
  • CAP Rate: 15%-16%
  • Class: D Area: This means that properties are in lower socioeconomic areas. Neighborhoods in D class areas are usually referred to as a “war zone.”

This duplex located in Riviera Beach had an asking price of $89,000. My client was ready to come in at $80,000, yielding him a 16% capitalization rate (also known as CAP Rate) – a pretty great return. Keep in mind, the higher the CAP Rate, the more dilapidated the area is. So, if anyone tells you, “I have a property that yields a 14% CAP on Lincoln Road, they’re lying. One of the two tenants were paying on time, and the other tenant was a new lessee. Long story short, this property was not purchased – why?

Doing your due diligence is vital in real estate and being proactive is even more important. Before I visited this property I did my homework and found out the following reasons this property was not a “good buy.”

1. Crime Rate: Riviera Beach, FL is a high-crime rate area (especially where the subject property was located)

2. No signs of growth: The property was located in a neighborhood that would probably not experience growth any time soon (maybe only after 10 or so years).

3. Resale Value: Although the property yields a great return, there is no chance that it can be re-sold for what it was purchased for. Let me explain: The owner was willing to sell this property for $80,000. The comparable properties are valued at around $40,000 (maximum $50,000). The area would have to experience a high growth rate for the deal to make sense (if the plan would be to re-sell it within 2-5 years). Mind you, many investors don’t purchase rental income properties for a quick resale – they purchase rental income properties for monthly cash-flow as properties appreciate.

4. Risk: When purchasing properties in D class areas, expect to have risk of not receiving rent payments on time. High reward (16% CAP), high risk (crime rate, unstable tenants, little or no growth).

Investing in real estate is a great way to make additional income, however, it can be costly when making mistakes. I am constantly educating myself with investment real estate. I have experience in analyzing a good purchase vs a bad one. There are many ways to analyze a real estate deal – this happened to be one way to analyze a deal (in which my client, who is also an experienced real estate investor agreed with). Who do you know that’s looking to invest in real estate? Do you have a property that you’re looking to sell? Email me at masso@kw.com to discuss real estate opportunities. Do you have something you want to share? Feel free to post it on my facebook!

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