The following blog post is the first in a series of posts based on a course that Jan Brzeski and Greg Hebner taught at UCLA Extension in early 2013. The course will be offered again on August 10, 2013. For more information, please visit the UCLA class webpage. How to make money investing in single family homes in the current market.
Last year, on CNBC's Squawk Box, Warren Buffet expressed the opinion that investing in single-family housing made a lot of sense. In the interview Buffet said if he could buy a couple hundred thousand single-family homes right now that he would. Lo and behold, suddenly many of the major real estate investment companies decided that they wanted to pursue this very strategy.
Currently, Blackstone Group is investing in single-family homes in the U.S. at a rate of tens of millions of dollars per week. All of this has changed the market and made investing in single family homes more competitive. However, there are still opportunities in single family homes. Compared to a lot of other types of investing options, investing in single family homes is very compelling. Buying and renovating single family homes can be very profitable. Some of the ways of ensuring a profit are to:
Buy all cash at a discount to retail market value. All-cash buyers can typically get a better price than traditional financed buyers/owner-occupants.
Create real value on the renovation. Immediately create additional value on a fix and flip property by making value-adding renovations. Determine what a buyer wants from a home in your target sale price range. Remember that what a buyer is looking for in a $2.5 million house is very different from a $250,000 house. Making a reasonable assessment is important in making a profit on the renovation.
Hold your investment instead of selling it. If you have built-in equity in the investment, you can rent it out to generate rental yield. In many areas, the yield on single family homes is generally higher than the yield you can get on apartments.
Use leverage. Obtaining low cost debt financing can add to the investment in a number of ways. With just 50% financing, every 5% increase in the house price is a 10% increase in equity. Even if the home doesn't appreciate, a loan can add to the return you receive on your cash investment on the property. For example, suppose you buy something at a 7% unleveraged return, you buy it for a hundred thousand, and then you got $13,000 per year of gross revenue and you have $7,000 per year that drops to the bottom line. If you add a 4% loan on that, the cash return is going to improve verses what it would have been if you held it all in cash.
If you are able to find a property that clearly has more opportunity on the upside than risk on the downside in these four areas, then it is time to consider investing.