Real estate investors have consistently been responsible for 15-20% of the single family home purchases in our community over the past 5 months.

 

Many of these investors execute a typical “fix and flip” plan. They buy a distressed home, invest capital to make it marketable, and then place it back up for sale as quickly as possible. This is a tried and trued plan with numerous TV shows, infomercials and “how-to” books littering the landscape for investors to peruse.

 

Yet I recently heard about an emerging hybrid of this plan where the investor purchases with the intent of renting the property for three to five years and then selling it.

 

A brief overview of this plan starts with a property purchase well below retail value. In addition, the investor includes for a 2-step repair expense. The 1st step happens at the time of purchase and pays for repairs sufficient to make the house rentable. The 2nd step occurs after 5 years of being a rental when improvements are made to the property in preparation for being marketed. The idea is to delay the sale to a time in the future when the market is stronger and a higher return can be achieved.

 

One example I’ve studied is an investor purchasing single family homes in the Bay area for 50% of retail value, paying $80,000 to $90,000 per unit. He budgets $9,000 towards repairs necessary to attract a tenant. He achieves $1,200 a month in rent. He has included in his five year budget a $10,000 expense to make improvements desired to achieve competitive market value prior to selling the house. In five years he believes the houses should sell for $200,000 or more.

 

This type of investment plan is very focused on a niche market. To apply such a plan to our market would require a careful study of present and future market conditions and our evolving demographics of Eureka, Fortuna, Arcata and McKinleyville areas. And this would not be a passive investment with up to five years of property management. Yet the yield would appear to be very attractive and its risk tempered by time.

 

And it’s the laser focus into a niche strategy that makes this plan so unique. And every successful investor will tell you that the most important part of your investment strategy – is to have a plan, and then go execute your plan.

 

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