A 2014 Gallup Poll shows that Americans believe that REAL ESTATE is the best investment, above stocks, mutual funds, bonds, gold, CDs or money market accounts. I agree – with the proviso that it is the best investment only when the real estate is chosen very carefully and with expert guidance. Here’s my “short” guide to real estate investment, with an emphasis on Atlanta. While your primary residence can be an excellent investment, in this piece the emphasis will be on investing in real estate you do not plan to live in personally.
For many, the best approach is to buy and hold, renting out for a continuous income stream. Some investors make great money “flipping” houses, but by and large I believe to do that well and profitably, it is best that you be well versed in building and renovation personally, and have a larger amount of time to spend overseeing the project. So today we’ll concentrate on the investor who wants to buy and hold for some period of time.
For the first time or casual investor (i.e., the person for whom real estate investing or building, developing, or contracting is not a full time job), it is vitally important that you know what you are getting into. Real estate is not a “passive” investment, even when you have a property manager. It will most likely take more of your time than other sorts of investments, but it can produce wonderful returns, both monetarily and psychologically. There is a lot to be said, for instance, for taking an unloved undervalued home and turning it into something beautiful, or choosing a property in a rundown area of town and watching it get better and better as the years go by. Just ask anyone who is sixty years old or older here in Atlanta. When that generation was of first time homebuying age (in their mid twenties), Virginia Highland was considered by many to be a rundown, scary area of town and not worthy of purchasing. Those who did NOT feel that way are the extremely lucky ones who either had foresight or luck or both. Now those homes are worth many multiples of what was paid for them back in the 1970s.
My husband and I own four rental properties, all in different neighborhoods and different areas of town. I started with rental properties by holding onto my primary residence when my husband and I got married and bought a home together. The home I still own is one I loved in a neighborhood that I couldn’t bear to totally leave. Over the years, I have rented that home to a series of young professionals who have given us an excellent return while generally taking very good care of the place. From there, for further investment properties I chose areas, communities and properties that I felt were on the “cusp” of becoming something great.
And that is how real estate investors often begin – by holding on to the property they lived in when they go to purchase their next principal residence. Sometimes they hold onto the old because the market is down and they cannot get what they want or need from the “old” house, and sometimes they hold onto it because it can become an income producing asset. More often, for both reasons. And that’s a good way to start. The home is in a neighborhood you know – and you KNOW the home; its intricacies and quirks – in short, you know what you are getting into.
But say you’re interested in exploring rental property for its own sake apart from your former residence. Obviously, a great time to do so was in the period between 2008 and 2013 when the mortgage meltdown brought property values down across the board. But even now that it’s a seller’s market, there are still bargains to be had – you just have to know where to look and choose carefully.
My favorite investment areas right now are the communities straddling the future West Side Beltline. As you know, the Beltline is a 22 plus mile trail around the city core that will one day link neighborhood to neighborhood and neighbor to neighbor. When the east side Beltline was completed just a few years ago, property values skyrocketed around the new Ponce City Market, Krog Street Market, and all the neighborhoods nearby. Indeed, the increase has continued and today properties are being sold with multiple offers above list price – and in some instances, buyers are even taking off appraisal contingencies so that they will win in the midst of a bidding war.
I believe that the west side is poised for the same sort of growth, and it’s getting a leg up from public officials who are espousing the benefits of developing these communities. In fact, City Council Member Mary Norwood has held bus tours of these neighborhoods to show potential investors and forward thinking city leaders the potential there.
To continue the Virginia Highland example, there are awesome examples of the same type of architecture found in that neighborhood elsewhere in Atlanta for a lot less money. For instance, the West End and Westview have Va/Hi bungalows built at about the same time; but of course those neighborhoods did not experience the incredible growth and popularity (yet) that Va/Hi has. In West End and Westview one can purchase one of those bungalows for less than $250,000. The same bungalow in Va/Hi would cost $650,000 or more.
Once you identify an area of town that is ripe for investment, like the West End, how do you choose the “right” property? You will want to calculate your ROI, or return on investment. It’s easiest to illustrate this by example. Say you decide to buy a property for $200,000. Your closing costs and some basic repairs on the property cost you about $20,000. So your cost so far is $220,000. If you rent out that property for $2,000/monthly, you calculate your return on investment as follows:
$24,000 (yearly income) divided by $220,000 (total investment) = 0.109, or 10.9% ROI
A great return (although keep in mind that you also want to factor in taxes and insurance on the property as investment costs).
Cash is king, and many investors find it easiest to obtain great rental properties by paying cash or using private equity, but if you leverage your investment your return looks even better. For example:
On that same deal, if I put down 20% for a down payment, my investment is only $40,000 plus closing and repair costs. With a loan, my closing costs will be higher, so by way of example let’s say repair and closing costs are $23,000 instead of $20,000. So I’m up to $63,000 cash out of pocket and I’m borrowing the rest. Say I use a 30 year loan at 4.5% interest – my monthly loan payment would be $811. If my tenant pays $2,000 a month, that nets me $1,189 monthly, and my ROI looks like this:
$14,268 divided by $63,000 = .22, or 22% ROI. Unlike the stock market, this is a return that is regular, predictable and which gives you some control over your investment. And there are other benefits, as John Adams recently pointed out:
- TAX BENEFITS. You can take a loss for depreciation and apply that loss to rental income OR to regular earned income, lowering your income taxes. Rental income is not subject to social security tax, and when sold your gain is “long term capital gain” taxes at only 20% federally and 6% in Georgia.
- BUILDUP of EQUITY. Your tenants’ payments are helping to pay down the balance of your loan, thus increasing your net worth. This is unique to real estate.
- This is the tendency of real estate to increase in value over time. Average appreciation is 4-5% per year.
- With real estate, you are able to borrow money to buy a larger investment than you might be able to pay cash for.
Real estate can be an amazing investment. Be sure you have the right professionals on your side, choose carefully, and go for it!
Mary Anne Walser is a licensed attorney and full-time REALTOR, serving buyers and sellers in all areas of Metro Atlanta. Her knowledge of residential real estate and her legal expertise allow her to offer great value to her clients. Mary Anne serves on the Committee that drafts and reviews the contracts utilized by all REALTORS in the State of Georgia. In addition, she is a member of the Atlanta Board of Realtors, the Georgia Association of Realtors, the State Bar of Georgia and the Georgia Association of Women Lawyers. Contact Mary Anne at 404-277-3527, or via email: firstname.lastname@example.org.