Investing Exit Strategy – When top Flip and When to Hold?

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I get asked all the time by investors when looking at property deal feasibility reports as to what is the best exit strategy for US property – flip it (resell) or hold it (rent)? Often though, the answer is not as black and white. One of the most important things I look for in any and every deal we do, or recommend to an investor, is to have TWO exit strategies. Have a plan B. This can be one of the most important parts of analysing any deal. We always want to have the preferred option, but have a backup in case circumstances change.

Now, there are a number of factors you need to take into account when looking at which exit strategy is best for any particular property deal. No one particular point is the most important, I generally look at all aspects and rate them, seeing which way a particular deal leans towards (flip or rental). Particular areas to look at are:

1. ROI – Rental return vs Flip profit

I think always the first thing we should always look at is what is the estimated return we will get from renting the property or selling the property. We also need to take into account when selling costs such as realtor commissions, taxes applicable, title company charges and settlement/closing costs. If a particular property is going to give a high rate of rental return (i.e. over 10% net after costs) then it could be a great addition to your portfolio to keep. If on the other hand, the rental return is down around the 6-7% but the profit from sale (again look at net after costs noted above) is over the 20-25% range, then it’s possible the best strategy may be to flip and invest the money into another deal.

2. Region Demographics & Market Forces

Demographics and market forces of a particular region or neighbourhood can play a role in what is the best exit or outcome for a particular deal as well. Certain areas may be heavily owner occupier properties, often giving higher property prices as it may be a popular area people want to live. This may lean a particular deal towards looking to do a better level or renovation/rehab and plan to flip the property. Other areas might be very strong rental areas; very low vacancy and high rental returns compared to the price of the properties might tend a particular deal to be a good rental. If you have properties in rougher or less affluent areas of a city, it may be best to renovate and sell, with the demographics of the area not conducive to getting good solid tenants. Don’t forget also to check sale prices in the region over the past 3-6 months, to see if the area is getting any capital growth. Maybe a boom in infrastructure or businesses is seeing prices rising, so again, it can lean a deal towards rental, to hold onto while the prices in the area appreciate.

3. Affordability or Price/Cost of the Deal

How much capital you have in the deal (or would have if you were to purchase) and the cost of funding (if applicable) is also a critical factor to look at. If the property cost is relatively affordable then it may be good to hold the property and look to purchase another for flip or hold. If on the other hand, a particular deal will tie up all your available capital, and if returns are such that you are unable to continue investing (stuck so to speak), then getting a chuck profit from sale, to enable you to continue to invest in your strategy might be the best option

4. Type of Property

The type of property you have or are looking at can also play a big part in the favourable exit strategy for the deal. Large 4-5 bedroom properties with 2-3 bathrooms possibly on large blocks, are not as generally favoured by renters, and/or don’t really get the rental return they deserve with rental demand more for the 2-3BR /1BA homes or apartments. Larger two storey properties though, could look to be turned into multi-family residences (MFR) with possibly a 2 BR unit upstairs and 2 BR unit downstairs depending on the layout. This can significantly increase the rental return a property can give. Occasionally, property layouts could even support 3 separate units, vastly increasing return – these would lean strongly to rentals.

Often it is not just one of the these points above that will decide for you the best option for your deal/property. It may be a combination of 2-3 points that gives you that Plan A, but you should always have ready that Plan B in case circumstances change. On the other hand, one particular point might be so strong in one direction, that it is easy to see the best outcome for the deal.

If your looking at starting or adding to your investment portfolio and would like to discuss options and strategies, book a call with us today!

Investing in US Apartments – A Good Strategy?

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In my opinion, investing in Apartments in the US has always been a good strategy for cashflow and even growth. Apartments are almost a hybrid of residential and commercial real estate. In the US, anything over 4 apartments in a building is classified as a commercial investment, but still driven by residential trends and demographics. On the other hand growth or appreciation of apartment buildings can be more linked to the Net Operating Income (NOI) of the building, more like the CAP rate of a commercial property. As much as capital growth in residential, particularly in a large number of US markets is not something you bank on, in apartment buildings, it can be something you have more control over.

For instance, if the rental returns in an area are rising or if you are able to rehab/renovate some units to increase the rental return, then the overall value of the apartment building will also increase, regardless of whether residential property is softening in the market or not. Its kind of having the best of both worlds in one investment. If the market in a region is booming and more and more people are buying homes, then house prices appreciate, and often apartments can “rise with the flow”. On the other hand, if markets are softening, becoming more of a buyers market than a sellers market, people get nervous, start selling and renting for a while. Rents can often increase as the demand for rentals rise, which can then increase the NOI of the building and hence, its value. Win – Win!

Now, there is a number of factors though, you need to take into account when looking at apartment buildings as an investment:

1. Management

Firstly, there is much more management involved. Apartment buildings are not necessarily for the “passive” investors, or those that want to sit, and forget their portfolios and just let them be. With the higher number of tenants involved in one building there is always a lot more management needed, even if you have a property manager in place.

2. Vacancy

You always need to factor in a vacancy rate for your portfolio, apartments particularly. Now one of the major advantages of apartments over houses, is that if you own 1 house and the tenant leaves, you now have a 100% vacancy rate on your portfolio until you are able to tenant the property again. If you have a one 7-apartment building for instance and one tenant leaves, that’s only a 14% vacancy rate. But understand, there is a good chance, particularly if you have a couple of apartment blocks that there will always be a couple of units vacant at any one time.

3. Affordability

Apartments can be much more expensive to purchase upfront, and costs such as property management, maintenance, insurance etc can also be higher as these are often treated as commercial investments if 4+ units. Need to ensure you factor in these costs when determining your returns and cash flow. Which brings me to the last point…

4. Returns

Returns on apartments can often be higher than single family or multi-family homes. Given the higher management and increased costs, the returns though can be better. If a particular area is giving 7-8% ROI in Single Family Residences (SFR’s) you may find apartment buildings can be 12%+, sometimes even higher!

If you are looking at a passive rental portfolio, and not afraid of the increase management and costs/affordability of apartment buildings, they can make an excellent addition to a portfolio. We have clients realising returns of over 17% on some apartment buildings and have seen EBIT’s (earnings before Interest and Tax) of over 25% possible – making sure to factor in increases in costs, maintenance and a vacancy rate.

If this is something you are interested in adding to your portfolio, book a call with us today!

Whats in Store for the US Market in 2019?

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Looking back at 2018, we experienced a year of high expectations that largely did not disappoint. Markets continued to stabilise, economic promise grew along with property values, and the revitalisation of cities nationwide provided opportunities and population growth.

It was a good year for investors. But now, we have to ask ourselves: what does 2019 have in store for U.S. real estate? What national trends will shape the markets on the whole, and what do we have to look forward to…or keep an eye on?

This is what you need to know as we look ahead for 2019.

Top Predictions for the U.S. Real Estate Market in 2019

Balance is the word.

As we consider factors like growing inventory and the slowing of appreciation and asking prices, the word that comes to mind is balance. In 2019, we expect to see the return of more traditional housing markets that offer less frenzied, more evenly paced opportunities over the extreme environments we have seen booming in the last decade. These will be the exception. Savvy negotiators may be able to snag a great deal, and some markets are still on that rise – Detroit for example.

If buyers start to slow down, they will rent while waiting for the market conditions to change, thereby strengthening the rental market.

What’s the deal with interest rates?

Interest rates were at their lowest recent point post-recession in 2008. The federal government controls short-term interest rates, while the market dictates long-term rates. When the government changes the rates at which banks are allowed to borrow money, it can take several years to shift the economy on the whole, while the trickle-down affects the average consumer, where it has an almost immediate impact on things like credit cards, student loans, and yes…mortgages.

Interest rates are moving from a decade of being historically low to 5 and 6 percent as we enter 2019. Economists and real estate experts alike are concerned that this could hinder consumer spending power and make the burden of mortgages greater. In regards to housing, it may deter buyers even as housing prices are expected to fall. But most of this is what we would call “Sticker Shock” Its simply that interest rates have been at record lows for so long people lose sight of the fact that 5-6% is still quite cheap (remember the 15-20% of the 80’s and 90’s!)

Good news too though is that if buyers start to slow, the will rent for the mean time while biding time for the market to change, strengthening the rental market for us Aussie investors!

What about the trade war issue?

The global economy has always been a factor in the health of our markets, real estate included. The issue here is that tariffs and trade wars on a broad, global scale, may cause issues in the US domestic economic markets. Economists worry that cold economic relations with allies and a possible trade war with China could cause economic instability by 2020.

However, none of these things are guaranteed or set in stone.

Despite these predictions, good and bad, they are just that: predictions. The best we can do is to plan for the long-term and choose sustainable, smart investments that help you secure your best financial future.