With housing prices still in freefall in formerly hot investment markets like Las Vegas, Southern California and Florida, what’s a savvy real estate investor to do?
Look for real estate smaller markets with strong growth prospects, says Scott Snyder, a registered adviser with the National Association of Residential Real Estate Investment Advisors.
Like his.
The number of properties bought solely for investment purposes was off 18.1 percent in 2007 from 2006, according to the National Association of Realtors, and declined nearly 29 percent from the heady levels of 2005. But Snyder says he is still tucking real estate investors into duplexes, multiplexes and single-family houses in Raleigh, N.C. — his home market — at prices so low that the rents are more than covering their mortgages from day one.
How is that possible?
Raleigh and the rest of North Carolina’s Research Triangle were hit hard by layoffs in the wake of the tech stock bust of 2001 and 2002, so local real estate prices missed the bubble that swelled on both coasts, Snyder said. Today, major pharmaceutical companies have set up shop and Fidelity Investments recently opened a branch, creating more than 5,000 jobs in all.
As a result, the demand for housing is high and so are rents, but houses can still be picked up on the cheap.
A house Snyder bought in a foreclosure auction for $135,000 in mid-June leased out on June 26 for $1,200 a month — almost 70 percent more than the expected principal and interest payment on a standard 30-year loan with 15 percent down.
Home prices have appreciated by about 6 percent in the last 12 months in the Raleigh area, according to Cyberhomes data, but out-of-town investors are not stampeding in. Snyder attributes their restraint to a tough mortgage market and a general “aura of fear” in real estate.
“It may feel uncomfortable sometimes,” Snyder says, “because every time I open the paper I’ve got to read the same headlines everyone else reads. But I know I’m making my payments comfortably, and we are still buying property.”
Plenty of other Raleigh homes are available in the mid-$100,000 price range, including this one: a three-bedroom, two-bath, 1,230-square-foot home on a half-acre lot, listed for $149,900.
Here’s a closer look at three other markets where investors can stand a good chance of covering their mortgages with the rent. All information is from Cyberhomes.
Poughkeepsie, New York
Median home price: $260,967
Median household income: $52,444
Unemployment: 4.1 percent
Renters: 55 percent
Poughkeepsie, located on the Hudson River about halfway between Albany and New York City, was the headliner on Housingpredictor.com’s annual list of housing markets that are expected to appreciate this year, leading the nation with an expected 5 percent growth rate.
That’s not what it feels like on the ground, said Houlihan Lawrence, Inc., associate broker Roxanne McLaughlin. A wave of foreclosures and short sales is pushing down real estate prices and sending former homeowners into the rental market.
Still, with its revitalized waterfront park and its rapidly refurbishing downtown, Poughkeepsie — the home of Vassar College — has managed to maintain a low unemployment rate, and rental demand is strong for deals like this $130,000 1850s era colonial, outfitted with a new roof and a new heater. It’s within walking distance of the train station, which is a 90-minute ride from midtown Manhattan.
Ely, Nevada
Median home price: $147,258
Median household income: $53,091
Unemployment rate: 4.3 percent
Renters: 17 percent
Sean Brown, CEO of the National Association of Residential Real Estate Investment Advisors, touts the investment benefits of this little town four hours northeast of his home base of Las Vegas. Its prospects have grown ever since the Robinson Nevada Mining Company reopened a nearby copper mine in 2004, pumping jobs back into the White Pine County economy.
The growth may not be over for Ely and its 3,900 inhabitants. A multibillion-dollar power plant has been proposed nearby. The potential addition of 1,200 multi-year construction jobs and 250-or-so permanent jobs could help stabilize the region’s notoriously volatile economy.
Home sales have slowed as prospective buyers from Las Vegas have found themselves unable to sell their old homes, said Debra Dean, an Ely-based associate broker for ERA Sunbelt Realty. Still, rents have run sky-high as newcomers — often shut out of the mortgage market for minor credit problems — have grown desperate to find housing.
Consequently, there are bargains such as this 1,177-square-foot home, listed at $139,900. Dean figures it would rent for $1,000 to $1,100 a month, easily covering an expected mortgage payment of about $735.
Bismarck, North Dakota
Median home price: $149,391
Median household income: $67,262
Unemployment rate: 2.5 percent
Renters: 26 percent
Like most of the upper Midwest, Bismarck slept through the real estate boom. But, with oilfields developing north of town and big-box retailers moving into the state’s capital, business is picking up and so is the demand for rentals, Century 21 Landmark Realty associate broker Amy Hullet said.
The city’s vacancy rate stands at a minuscule 2 percent, Hullet said. Most of the city’s real estate investors are hanging onto their properties because they’re generating positive cash flow, but a few prospects are on the market, including this 1,467-square-foot duplex listed at $102,900. It’s generating about $900 a month in rents, with mortgage payments expected to run about $600.
If you look for real estate markets with low unemployment, relatively high rates of renters, and a recent influx of industry or infrastructure projects, you should be able to find affordable investment properties whose rents will more than cover the cost of ownership.