By Melissa Terzis, Realtor, City Chic Real Estate, Washington, DC:
We receive a lot of inquiries at our downtown Washington DC Brokerage from investors looking for a real estate windfall. The sarcastic side of me wants to tell them, “Aren’t we all?”
As far as finding an investment in this market? Don’t do it.
Smart investors know: to be successful you have to follow two simple rules: Buy low and sell high. But for every smart real estate investor there are about a dozen who weren’t so lucky. But all clients believe they are going to be the one – the smart investor who flips a property for tons of cash.
It’s all about timing. And the time for investing in residential real estate in DC has passed.
The market here has already pushed prices far above where many of us in the industry expected them to go. It’s still saturated with buyers who think nothing of escalating tens of thousands of dollars over list prices. There are no more good deals. But people don’t believe me.
I blame the media, and I blame the home improvement shows. The news of the real-estate market in DC has long been frothy, citing a plethora of jobs here, a robust economy, and generally painting the city as a home run for real-estate investment. And home improvement shows make renovating look like a piece of cake. Yes, two hot guys are dying to custom-renovate your home into a luxury abode for a cost of a few bucks to you and zero profit to them.
The calls usually come from area codes that are far from DC. This is how I know we have another believer who just finished reading an article in their local business paper about DC and how great it is. Now they want to plunk down some cash and enjoy huge returns in a relatively short timeframe.
The callers always say the same thing. They want “a great deal, in an up and coming neighborhood,” where they can “have a positive monthly cash flow and sell for a profit in a few years.” And they “don’t mind doing some work.”
They are not the first, nor the 10th, nor the 1000th person to think of this brilliant idea. I don’t like depriving people of hope, but a dose of reality comes next. It usually boils down to this:
- Do you know anything about this market? No? Well, you have tons of competition.
- You will not be able to compete with buyers here who are escalating sometimes 25% over asking prices.
- Were you living under a rock in 2002 – 2005 when the steady reduction in interest rates resulted in a huge bubble? Did you block out the ensuing years of misery? It took many people in DC close to 10 years to recoup their investment from the early/mid-2000s.
- There is no such thing as an “up and coming neighborhood” in DC anymore. Every single neighborhood has jumped on the redevelopment train or has plans in the works for it, save a few neighborhoods that may not see redevelopment for a decade or more.
- Stop looking at homes as investment vehicles. If you find an agent who guarantees you a profit in a few years, they’re lying.
There are no big secrets here. What I know is what everyone knows.
There is a desperate, scrappy pool of buyers in DC who need houses and who will stop at nothing to get them. Competition is tough. Homes listed in hot neighborhoods get up to 20 bidders in many cases. If you’re the winning bidder of a multiple bid situation guess what?
You paid too much!
So the investor looks to the “overlooked” neighborhoods – the places where no one is clamoring to live but where there are rumors of future development and change. They don’t realize there’s a cost to a purchase here that far exceeds the price.
Owning a property in a neighborhood where prices are low, on the hopes that one day Whole Foods will build a store on that empty lot across the street while you contend with a lack of amenities and a lack of suitable tenants who pay their rent while you wait for the market to catch up to you? That’s not a very promising investment. Nor is it fun to endure. Unless you like replacing your stolen copper wire or busted windows on a weekly basis.
I had an out-of-state investor call me to explain he had purchased a 4-unit apartment building in one such neighborhood; he’d heard the neighborhood was hot. He purchased 3 months prior to our call, bought some supplies to renovate the apartments, didn’t finish, and now wants to sell for a 20% profit.
He paid $500,000 and wants to sell for $600,000. The justifications were comical.
I asked what value he’d added, i.e. did he get any of the units leased? No. There were tenants in 3 of the 4 units paying $300, $500, and $600 in rent, respectively. I asked if he knew those tenants had tenant’s rights. He couldn’t just throw them out to renovate and raise the rent. There are protections in place for tenants for that very reason. He didn’t know that either. He thought that a trip to Home Depot for some supplies and the passage of 3 months’ time in the Golden Land of Washington, DC was enough to squeeze a cool $100,000 out of the building.
I asked him if he understood that in DC, investors seek a cap rate between 6-8 and his was 29, that it would, in effect, take him 29 years to pay off his investment. He asked what that meant. I said, “It means you overpaid.”
He went silent. Then I heard him whisper to his partner, “She says we overpaid.”
I asked what due diligence he’d done to determine that the property was worth $500,000 when he bought it.
“That’s what they were asking,” he said.
There are more out there like him. Many more. I guarantee it. When some areas of the country start crashing, we’re going to find out, again, just how many speculators there were. By Melissa Terzis.
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