Best Strategy in Best Market

[Matthew Philipchuk]

I am a newbie to US real estate investing. I would really like to hear from the experienced investors in BP what they think is the best investing strategy and in what market. Why do you focus on the strategy you focus on?

For example is it:
Flipping houses in the city of XX with XX% annual return. or
Wholesaling in the city of XX with XX% annual return. or
Buying foreclosures and renting in XX with XX% income and XX% appreciation annually?

If anyone can share that experience I would be grateful.

[Brandon Turner]

Hey Matthew Philipchuk - Good question! In my experience, it definitely depends on the area. For example, flipping isn't real great in my market because houses are so cheap - not a lot of spread (plus it's difficult to sell.) On the other hand - my market is great for small multifamily properties that produce fantastic cashflow.

Many areas, however, are the exact opposite.

For me it comes down to whatever type of investing fits best with your lifestyle, personality, and skill set - and then applying that to whatever market you are in.

That said - you can't go wrong with good old fashion "Buy 'n Hold" as long as you buy conservatively. :)

My thoughts. Anyone else?

[Glenn Espinosa]

Im currently struggling with this concept myself. In the end Brandon Turner is right in that a lot of it depends on 1) your market 2) your personal investing tendencies.

If you want money now and fast, you could argue to flip in almost any market. In some markets you will take on much more risk, less volume and smaller profit margins, but if you're not a buy/hold kind of guy then that might be all you're willing to do.

[Tiger M.]

Its the old tortoise and the hare issue. I flipped to get cash for properties that could be held. Then believing in slow money concept, used 15 year loans, sacrificing cash flow early for cash flow later in life when the loans retire. All depends on your ultimate personal goals

[Brian Burke]

I can't definitively day what markets or strategies are "best", but I can share what is working for me right now.

I'm buying rental houses in California. There is high demand for renting houses in CA because foreclosed-out former homeowners are looking for houses to rent. Only 1 out of 5 foreclosed homeowners move into an apartment, so apartments aren't seeing the same demand forces here. To make matters better, home prices have fallen as much as 75% from the peak in some areas, and are about half of replacement cost (or less).

I'm buying apartment complexes in Texas. There is high demand for renting apartments in TX because there is fierce job growth and in-migration. People getting a new job or moving to a new area typically rent an apartment, so the demand is driving rent and occupancy growth.

I agree with Glenn, flipping is a good strategy and you can probably do that just about anywhere...however I'd argue that it is likely more profitable in higher cost areas. At least, that has been my experience.

[Matthew Philipchuk]

Thanks for your thoughts gents.

Brandon Turner I am from Canada but live in the USA. I am not in the US very often so I am looking to invest from abroad. I am not bound to any strategy or region but I am limited by my need to asses an opportunity remotely for the most part.

At the moment my analysis has brought me to consider buy and hold in Dallas ($100k range) using a Foreign Investor Loan for leverage (65% LVR and 6.25% interest) and to buy and flip ($100k range) and buy and rent ($50k range) in Kansas. The Dallas hold strategy will bring about 15% annual return thanks to the loan (9% without) and hold in Kansas will bring about 13% annual return (no good options for loans there) and the flip in Kansas will be about 15% per flip (3 per year?) for 45% ish annual. The flip looks the best but there may not be much capacity with my contact.

Does this sound realistic and are there better strategies for a remote investor?

What area are you in and what is a fantastic cash flow?

Tiger M. I like the 15 year loan strategy but I am questioning if its is best. I am considering this for my Dallas buy and hold strategy. The bank that will lend to me as per above will do it either as a mortgage w/ 15 year term or a interest only loan both at 6.25%. If I buy 10 houses with 35% down at an average price of $100k I will require $350k down. If I go for the 15 year mortgage my annual return would be 19% with the interest only loan or 11% with the 15 year mortgage. The difference in the annual income would be $25k ($68k vs $43k). However at the end of the term with the principal paid out the Mortgage route return would be 24% vs 19% for the loan due to the pay down of the principal. This is excluding appreciation which effects both strategies equally. So the question is would I invest the extra $25k annually from the loan route to make up for the difference. With compounding returns it is quite easy but...

Brian Burke
I am curious about California. What are the prices of homes you are buying and what type of net cash flow are you seeing?

I have a contact that is buying apartment complexes in Dallas which are distressed. They evict everyone and add security gates and cameras and day care facilities etc... then they rehab and fill it back up with higher rental tenants and when they get to 85% capacity they finance it with a bank. They return the investors money once they get the financing but investors keep a significant interest in the property after recovering their investment. Is this the type of thing you are doing?

[Brandon Turner]

Hey Matthew Philipchuk - I'm located in Western Washington - which is pretty expensive usually except for my small county.

The biggest concern I'd have for your strategy is flipping, to me, would be next-to-impossible to do without being there on a day-to-day basis. It's also tough to guess your ROI since there are so many things that can go wrong. Thoughts?

[Brian Burke]

Matthew Philipchuk, on houses, I'm seeing around 7% to 9% net yield (we've been buying as high as 14% net yield but cap rate compression is underway), and on a levered basis we're in the high teens. Nothing to knock your socks off, but the properties I started buying 18 months ago are up 10% to 15% in value, not even counting that they were bought 20% to 30% under their current value at the time. I expect that total IRR after a 5 year hold will yield in the twenties.

As for apartments, I'm not taking as aggressive of a strategy as your partners in Dallas. I'm buying complexes in B or C neighborhoods where I can add value with moderate renovations and upgrades, and/or management improvements. The "kick 'em all out" strategy carries more risk that I'd prefer to undertake (and is usually a strategy in a D neighborhood which I'd rather stay away from). I did a deal in Austin recently that came close to that, it was a major rehab of a C- deal, but instead of kicking everyone out, I did the interior upgrades on turnover, and rent increases accellerated the turnover to some degree, allowing me to complete all 54 units in about 12 months. The difference was, I was collecting income which allowed a positive NOI during the renovation.

My investors are typically staying in the deal, not refinancing out, but it can be done in a perfect world. Trouble is, the real world is less than perfect.

[Aaron Mazzrillo]

I don't believe there is a perfect strategy for any market. As a southern Californian, I see so many investors specializing in different techniques and strategies. A better way of looking at investing is to decide what you like to do, then learn how to apply that to the market you are interested in doing business in. Chasing dollars is not the way to wealth. Becoming good at something, then doing it consistently and persistently is a much better model.