Real Estate Investment in the City of Richmond - The Too Typical Story These Days

Back in May 2011 I reported on news from Inman News that real estate investors would be major drivers in the real estate market for the foreseeable future, particularly in the foreclosure and short sale worlds.

That has certainly proved to be true. Experienced investors have been in the buying mode for the last several years, even if their personal investment models have radically altered. For example, I have several investor clients who went from flipping houses into "buy and hold" rental property. My condominium developers stopped doing condos and started doing apartments. The driver for all these changes: available financing for flipping and condominium development went "poof!" overnight. But money for income-producing investment properties, or developing apartments, was and is still available and even cheap.

The very interesting phenomenon that I observed beginning mid- to late last year, which seems to be gaining traction: people who have never held investment real estate are trying to get into the game. It makes perfect sense, when you realize over a ten (10) year time horizon real estate has outperformed the major stock and bond indices by substantial amounts - 40%+ return on investment compared to 15% or even negative returns. [NOTE: These statistics are according to the annual update program I saw at the Greater Richmond Association of Commercial Real Estate ("GRACRE") on Tuesday.] There are also special tax advantages to real estate, versus other types of capital investments.

Here is the typical "new investor" call I am getting more and more:

BUYER: "I'd like to start buying some investment real estate."

ME: "Great! What are you looking for, and what are your financing sources? What type of return on investment are you expecting?"

BUYER: "I want to buy a duplex or triplex in the Fan. I've talked to my banker, and (s)he says I'm qualified to buy. It needs to make money right away."

ME (Thinking, not saying): "Get in line. Everybody and their brother is looking for investment real estate in the Fan. If you don't have cash and you can't move quickly, your chances are somewhere between slim and none. And, P.S., by the way, Fan duplexes are almost NEVER going to cash flow. They are too expensive. They are great investments if you fit one of three (3) scenarios: (1) you have a ton of money you need and/or want to put down; (2) you are buying it as an owner-occupant, with the rental on one unit to offset your own mortgage expense; or (3) if you want to convert the property back to a single family residence."

ME (Saying): "Well, I think you are going to face a lot of competition from some really well-financed players in that submarket. Also, any investment real estate in the Fan is going to cost you well upwards of $300,000. That's a lot of money at risk for your first investment property. Why don't we consider single-family homes in [BLANK] neighborhoods, which I really think are going to have a continued upward trajectory in value and marketability."

BUYER (Oftentimes now huffy): Well, no, that's not what I want. I want a Fan multifamily property. My brother's sister's aunt's father-in-law bought a Fan duplex in pristine condition for only $150,000 just two weeks ago. And my lender says I will qualify for 80% financing up on properties up to $400,000.

Sigh. What's a girl to do? I've got colleagues who say it is not our job to protect people from themselves. If people want to make a stupid investment, you let 'em. Sell them the property, take your commission, and don't look back. The problem is, I feel like in many ways protecting people from themselves is exactly my job, and if I don't advise a client that I think is contemplating an....let's say "imprudent" investment....I am shirking my fiduciary duty.

What's the right answer?

Here's where I am right now: For any of you folks who want to start slow and small building an investment portfolio in the City of Richmond, give me a call. I'd love to help. For anyone who has buckets of cash and needs somewhere to put it, and likes City investment real estate, call me too. And for those people who fit into Categories 1, 2 and 3 for Fan or Area 10 multifamily properties, I'd love to help you also. New investors who sound like my fake Buyer above, I'm not sure I can help you buy, but I sure as heck have a bunch of properties I'd love to sell you. [:)]

Comments

[Melissa Loughridge Savenko]

Ha! I'm experiencing the same thing. I think it's a number of things driving it: inexperienced investors, national news about the buyer's market, access to information on sites like Zillow, Trulia, etc.

Here's what I try to communicate on all of these points:

1. The point of coming to a real estate agent experienced in investment properties in the area you wish to invest in is to get professional advice on your initial investment. You need to listen to that advice.

2. The national news about it being a strong buyer's market: Not necessarily true in the local submarket you want to invest in. For example, NOT a buyer's market for multifamily property in the Historic Fan District. Looking like a strong SELLER'S market.

3. In your own Internet research: Zillow, Trulia, Fill-in-the-Blanks national syndicator is a good place to start. HOWEVER, information is not = to knowledge. Tell your agent what you have concluded as a result of your Zillow research. And then, if your agent tells you that conclusion is wrong, please listen to them. They can tell you why. Please do not insist that you know more about the particular real estate market than the person who does this every day for a living does. This has nothing to do with your intelligence. If you do not respect your agent as a professional hired to advise you throughout the purchase and/or sale process, well then...why do you have an agent?

These are just one woman's thoughts. I'm interested in how other people feel about the topic. How about some of those newbie investors commenting?

MLS

[Tara Semtner]

Ahhh...the newbie investor. I must have been contacted by at least 8 of these last year. Duplex must only be in the Fan, move-in ready (ok- they might paint...inside only), with no less than a 6% CAP rate, with only 20% down, would rent the whole building. This is what their dad/friend/neighbor told them they did in Michigan/anywhere else/10 years ago and now they have a big retirement cushion.