MANASSAS, Va. – May 4, 2009 – While it may seem crazy to bet on real estate for a steady retirement income these days, that is exactly what Edward and Olivia Green are doing.
With their golden years fast approaching – he is 64 and she is 60 – the husband and wife have snapped up five investment homes in the past three years. They hope to buy more as the struggling real estate market continues to produce cheap properties. Their portfolio includes a condominium apartment in Manassas; two houses in Prince William County; and two houses in Memphis, Tenn. Their goal is to buy cheap foreclosure properties, fix them up and rent them out.
The Greens said they prefer real estate to stocks and bonds because they can touch it, drive by it on a weekend and look at it – which gives them a level of comfort in the midst of a volatile economy.
Buyers such as the Greens seeking long-term cash flow from their holdings are emerging as the new investors of the bust. In many ways, they are reclaiming the term “investor” from the speculators who bought homes during the boom years with intentions to flip them for quick gains.
“At the peak of the bubble, you had a lot of people who called themselves investors but were really only buying a property with the hopes of selling it at a higher price to a greater fool later,” said Michael D. Larson, a real estate and interest rate analyst at Weiss Research in Florida. “The long-term way to invest in real estate is to buy cheap and buy at a level where it is profitable to rent; traditionally, anything you got from appreciation was icing on the cake, not the cake itself.”
In areas such as Prince William County, where sales of foreclosure properties have dragged down home prices but rents remain relatively strong, the Greens’ strategy has become particularly popular, local real estate agents said. Nevertheless, these are not easy times for those looking to profit from the bust. Lending standards have tightened, making mortgages for investors harder to come by. There is also no guarantee that home prices will end their free-fall. Buying a foreclosed-on home, fixing it up and then becoming a landlord requires patience, vigilance and capital, and success is not certain.
The Greens have had their stumbles. Their first investment property was a two-bedroom, two-bath condominium apartment not far from Interstate 66 in Manassas that they bought from their daughter in 2006 for $250,000. At the time, they anticipated that the housing market would take only a mild hit, and so they financed the property with a mortgage but rented it out for less than their costs. They expected to sell as home prices appreciated. That didn’t work out, so they’re taking a hit to their cash flow – a mistake they don’t intend to repeat with the other places they own.
Glenn Kelman, chief executive of Redfin.com, an online brokerage based in Seattle, said one of the first questions to consider as a potential investor is whether you want to become a hands-on landlord.
“If they don’t want to become a landlord, then they have to hire a property management professional, and that is going to cut into their investment,” Kelman said. “That is the fundamental decision that somebody has to make when going from a very liquid asset [such as stocks] to something that is not all that liquid – and will make their phone ring in the middle of the night when the toilet clogs up.”
While rental income ideally provides a steady stream of cash, a tenant’s finances can fall prey to the souring job market. With the recent wave of foreclosures, potential tenants may also have shoddy credit ratings, meaning landlords need to decide whether they’re worth the risk.
Kelman said the best investors are often the “fix-it” types who can quickly size up how much they need to spend on a property to make it rentable. They are also the ones who are willing to spend their weekends and evenings making those repairs and maintaining the homes over time.
“They are often wearing a tool belt on the weekend and doing it all themselves,” he said.
Last month, Michael McNally of Chantilly paid $53,000 for a three-bedroom, 2 1/2 -bath house in Dumfries. To make the purchase, he cashed in a $60,000 certificate of deposit that was earning interest at about 3 percent, he said.
McNally initially estimated that he would need about $7,000 to get the property in shape. He now expects to come in about $1,500 over that by his self-imposed deadline of June 1. He has already redone some walls, added fresh paint, gutted and refurbished all three bathrooms, and put down new carpet.
McNally, an information technology manager for a government contracting firm, said he was inspired to get into real estate investment by his 85-year-old grandfather, who started buying properties as a side job in Pennsylvania in the 1970s. He now owns about 45 such homes that have been paid off, McNally said.
“He just rakes in all kinds of money,” he said.
Danielle Babb, a real estate investor and a co-author of the book “Finding Foreclosures,” said she has been approached in recent weeks by many people looking for such properties. Many are getting discouraged, she said, because banks are taking a long time to close on offers and finding financing has grown increasingly difficult.
Banks are turning down some would-be buyers, even those with pristine credit, if they have risky loans on their credit reports. Credit card debts are also causing problems at closing, with some banks asking buyers to pay off such accounts, she said.
The best way to close a deal quickly is to pay cash, Babb said. If you need financing, make sure you’re satisfied with the mortgages you have on the properties you already own – your residence and any vacation homes – because it will become difficult to refinance once you start borrowing for other properties, she said.
The Greens bought their second property in 2007 using cash from a home-equity loan on the house where they live. The property is a three-bedroom townhouse in the Lake Ridge subdivision of Woodbridge that had gone into foreclosure. Olivia, who is a real estate agent, had been showing the home to a military client who was interested in buying foreclosures.
“We opened the door, and it was a disaster inside,” she recalled. “Even though she was looking for a foreclosure, she couldn’t see the potential in that one; she couldn’t see what could be done.”
That evening, Olivia spoke with her husband, who runs a home repair business. They went together to view the property. They decided that with some work, the home could fetch a good rent, so they paid $235,000 in cash for it. Edward undertook about $16,000 worth of improvements – new paint, appliances, countertops, hardwood floors and more. Once the work was done, Green called her client and told her about the improvements. The buyer who originally balked agreed to rent it for $1,695 a month, Green said. That translates to a monthly profit.
In search of cheaper properties, the Greens researched other hard-hit parts of the country. They considered Detroit, looked into some communities in upstate New York and settled on Memphis. They hired a local real estate agent through a family friend. The agent e-mailed photographs and descriptions of homes.
During a week-long trip last year, the couple selected two houses. They bought one for $16,000; it needed another $16,000 in repairs. They paid $35,000 for the other; it needed just minor touch-ups. Given the distance, they hired a property manager to rent those homes.
Their latest purchase was a three-bedroom, 2 1/2 -bathroom townhouse in Dumfries they bought out of foreclosure for $60,000. They are making some repairs and hope to rent it this month.
“We are baby boomers, and we are looking for another way to have income,” Edward Green said. “It provides good cash flow if you have income coming in from rent, and with what is out there now, this is probably our best bet.”
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