The market crash of 2007-9 caused many people to be leery of real estate investing generally. This is easy to understand: For most of us who were not around during the Great Depression, the Great Recession was the worst economic time we’ve ever seen.
Tear it down? Heck no! Investor makes 12% a year on this $20k wholesale house with no maintenance costs (end buyer is rehabbing it).
There continues to be a lot of residual fear of real estate….we run into people who think that the next downturn is going to make all real estate ‘worthless’ and consequently, investing in real estate is too risky to consider.
We agree that some types of real estate investing are risky, such as typical boom/bust retail markets, including parts of California, Las Vegas and Florida among others. If you buy retail property at or even above market prices in a booming economy, especially with a mortgage, you are indeed taking a risk that can come back to haunt you in a crash.
However, investing in distressed single family homes such as we do in our city is not risky. We owner finance them to carefully selected blue collar buyers, so we do not do any maintenance (renting out these kinds of houses is another matter entirely). In fact, rather ironically, buying ‘junky houses’ in some markets is very profitable and safe, in up and down markets, with owner financing.
There are four reasons why:
#1 We Buy Distressed Homes Under Market Value
We usually buy houses at 70% or less of market value. If the house is worth $80,000, we seldom pay more than $55,000 or so for the property. If we cannot get it at that price, we move on to the next deal. Buying cheap means that we are protected in a down turn. It also means that there is plenty of room for us to make a profit, AND for our investor to make a profit as well.
#2 The Prices of Distressed Homes Are More Stable
A distressed house priced at $60,000 in today’s market in our city may fluctuate some in a down market. But the fluctuation will not be nearly as severe as in higher priced, middle class homes of $200,000 or more. In the last crash, the prices of distressed homes did drop 20-30% in San Antonio.
HOWEVER, the price drop can benefit the wise investor who is liquid. If you have planned ahead for the downturn and have cash, then you can buy up properties when the prices drop. You will be able to pick up a $60,000 house for $40,000 or even less in some cases.
#3 The Demand for Distressed Homes Goes UP in a Market Crash
The drop in distressed housing prices doesn’t last long in a down market. The reason is that as middle class homeowners lose their jobs and homes, they have to live somewhere. They turn to cheaper, distressed homes to provide them a place to live. In the last crash, we saw demand for our homes increase after a brief downturn in prices.
#4 Our Market Has Endless Demand for Affordable Homes
Our city’s high number of blue collar, Hispanic, cash-only buyers means there is never a drop in demand for affordable homes. It only increases in a downturn. There always will be credit challenged owner finance buyers seeking to buy an affordable home. We carefully qualify these buyers to ensure that they pay you on time month after month.
Our profits from 2007-9 only increased in distressed houses in our markets.
In summary, run down or ‘junky’ houses can actually be surprisingly good investments, especially if you owner finance them to carefully selected buyers with good income and 10% down payment.