Finding Solid Ground

Spotting investment opportunities in a tough real estate market.

It happened without a sound. If only it were possible to hear the real estate bubble burst, then maybe the downturn in the housing market wouldn’t have caught quite so many people off guard.

And the outlook remains rather grim. At the current rate, it would take nearly a year to sell all of the unsold homes that dot the nation’s landscape. It’s a real worry for homeowners thinking about the basic economics of the situation: The glut of supply will only continue to depress home prices. Indeed, the residential real estate market is on shaky ground.

All of this has made it challenging for real estate investors looking for stability. Many homeowners who were unable to sell their homes have unexpectedly become landlords. At the same time, owners of investment properties have been rejiggering their approach to evaluating investment options. With a slew of former homeowners entering the rental market, many landlords are able to demand higher rents.

Take Patrice and John Hopkins who have owned investment properties since March of 2005 and done quite well. A year ago, the couple pocketed a $45,000 profit from the sale of a 2.3-acre piece of land in Fredericksburg, Virginia, that they’d purchased a year earlier. The parents of two daughters—Amari, 8, and Alexandra, 2—they are ready to reinvest. But now that the housing market has taken a hit, the couple is moving with caution.

Actually the couple would like to undertake a rather big project. They’re looking to purchase as many as 10 townhomes that they will rent out. Patrice and John, who reside in Triangle, Virginia, and have an annual household income of $225,000, want to spend no more than $130,000 per property. They’re also weighing participation in the federal government’s Housing Choice Voucher Program (often referred to as Section 8), which allows low-income families to lease affordable, privately owned rental units and would provide the Hopkinses a guaranteed income stream.

Yet even at a modest price point for each property, they’re still making sure that they’re performing the necessary due diligence to ensure that they’re not paying too much. After all, foreclosures have climbed, partly because investors who bought at the top of the housing boom with an adjustable rate mortgage were unable to charge rents that covered their reset interest rates. In May, foreclosure filings were up 48% from the same time last year, according to RealtyTrac Inc.

The key, Patrice says, who works as a social worker in Woodbridge, is to find the highest quality investment property that would guarantee positive cash flow. Because there’s a glut of unsold town homes and foreclosed properties in the northern Virginia market, she and John, an engineer, plan to take their time and find the most advantageous deal. “We want a mortgage we could still pay if we weren’t able to rent it out and that wouldn’t interfere with our other financial responsibilities,” Patrice says.

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