Vulture investors: Back and making a bundle
15.08.2010 00:00
Vulture investors: They're back - and making a bundle
Tanya Marchiol invests in real estate for the long haul.By Les Christie, staff writerAugust 5, 2010: 8:36 AM ETNEW YORK (CNNMoney.com) -- These are the glory days of the residential real estate investor. Low prices, rock-bottom interest rates and stable rental markets have created huge buying opportunities.
"It's awesome right now. I don't think we'll ever see another time like this," said Tanya Marchiol of Team Investments, which has operations in about 10 states but focuses mostly on the Phoenix market.
These investors are known to many as vultures because they swoop in and buy "distressed properties" -- foreclosures and short sales -- cheap. Places like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70%.
But how they're investing has changed. In the boom years, they would buy a property and flip it for a quick cash out. Today, they are holding and renting for hefty, steady incomes.
Once they analyzed their decisions based on home-price appreciation, which is very speculative. Now they consider potential rental profits, which is far more stable.
Back then, they flipped often and helped to bid up home prices into a froth. Now, the investors say, they can be a part of stabilizing neighborhoods.
"People are not in it to flip like back in the old economy," said Matt Martinez, an investor and author whose new book, "How to Make Money in Real Estate in the New Economy" comes out next February. "The new economy dictates that you have to have a long time horizon."
Marchiol, for example, does not even factor in home price appreciation for at least a year. After that, she calculates only a 3% annual increase -- a return that won't turn heads of investors who only want to buy low and sell high.
Marchiol just purchased four separate four-plexes in North Phoenix. Three years ago, each four-unit building sold for $310,000; she paid just $70,000 per building. She intends to spend about $64,000 rehabbing the properties, making her total investment $344,000.
In total, she currently owns about 17 rental units. Usually she buys the properties to keep herself, but she also works with a group of investors who are intent on holding them and renting them out. She can spot the deals and then sell to them.
For example, with her North Phoenix buildings, the investors will buy the buildings for $95,000 each. They'll put 20% down and finance the rest, about $76,000 per building.
At today's low interest rates, they'll get a near 5% loan. That yields a payment of about $400 a month. Figure another 10% of the price for property management, 10% for maintenance, an 8% vacancy rate, taxes, insurance and other home ownership expenses, and you're talking about a monthly nut of roughly $1,300.
Marchiol projects the apartments will rent for $600 a month each, for a total rent roll of $2,400. That gives the owners a profit of $1,100 per month and $13,200 per year -- a nearly 70% annual return on investment.
Although conditions are very favorable, investors have to be adaptable because the market is evolving rapidly. In Phoenix it's changed in just the past six months. Foreclosure auctions are no longer a fertile hunting ground for Marchiol.
"Amateurs have come in and run up the prices," she said. "In 2009 I bought 76 properties at foreclosure auctions, at an average of about 60 cents on the market dollar. This year, I've bought four."
Glenn Plantone faces a similar situation in Las Vegas. A veteran real estate broker and investor, he has switched from buying mostly foreclosures and repossessions to short sales almost exclusively. That's because the inventory of distressed properties available in Vegas is way down, to about a two-week supply.
"The banks make better profits with short sales, so they're not foreclosing," Plantone said. "They've switched staff to processing short sales and they've gotten faster at processing them."
He tries to purchase properties for at least 10% less than what he considers to be true market value, then he does some light rehabilitation and sells them to some of the 3,000 buyers he works with.
Since prices have fallen about 70% in some Vegas communities and rents have only declined by about 20%, it's possible for his investors, who are cash buyers, to make money from the first month the homes are rented.
"We're getting cash flow (net return on investment) of 12% to 14%," he said.
He doesn't completely ignore potential profits from home price appreciation because he believes the town is bouncing around the bottom. (Homes already sell for below what it would cost to build new homes.) He does not, however, emphasize that aspect of the investment.
It's the income from rentals that's paramount right now.
The beauty of cash flow, of course, is that even if the prices decline another 10% or 20%, the investors should be able to live with that.
"I tell them to plan on holding for five years," he said. "With cash flow, there's no need to worry about price drops."
#cnnfb_connect {background-color:#f5f5f5;width:auto;height:auto;padding:10px;clear:both;} First Published: August 5, 2010: 8:19 AM ETRight Now
Motorola's second version of its popular Droid phone features a centered keyboard, Wi-Fi hotspot capability and Flash. Google responds to naysayers on its joint policy proposal with Facebook, with a long fact sheet about its ideas on Net neutrality. The velocity of mobile OS debuts is spelling a faster end to the PC era than anyone could have predicted.
| 30 yr fixed mtg | 4.52% |
| 15 yr fixed mtg | 3.95% |
| 30 yr fixed jumbo mtg | 5.37% |
| 5/1 ARM | 3.49% |
| 5/1 jumbo ARM | 4.09% |
Find personalized rates:
Bankrate.com.
Buying shares in a diversified mutual fund, not picking individual stocks, is a safe way to begin investing. Ben Bernanke and the FOMC steered clear of using the word deflation, easing tension in the stock and bond markets. Co-founder Reid Hoffman talks about why he created the social network and the projects he'll be working on in the future.
| Markets | Last | Change | % Change |
|---|---|---|---|
| 10,303.15 | -16.80 | -0.16% | |
| 2,173.48 | -16.79 | -0.77% | |
| 1,079.25 | -4.36 | -0.40% | |
| 2.69 | -0.05 | -1.72% | |
| 1.28 | -0.01 | -0.55% |
| Company | Price | Change | % Change |
|---|---|---|---|
| 3.88 | 0.01 | 0.26% | |
| 13.23 | 0.17 | 1.28% | |
| 21.36 | 0.00 | 0.00% | |
| 19.15 | -0.30 | -1.54% | |
| 9.39 | 0.43 | 4.79% |
Sections
Oracle is charging into unprecedented territory by suing Google over open-source patent infringements -- a battle that will take years to slug out. | A new bill signed by Obama cuts loan guarantees for renewable energy projects by $1.5 billion. When are we going to start putting green money where our mouth is? | Oracle is charging into unprecedented territory by suing Google over open-source patent infringements -- a battle that will take years to slug out. | Runners have flocked to a new cult shoe brand -- and so have counterfeiters. | Sure, it's expensive to buy the toys of the rich and famous. But buying them is just the start - once you have them they cost a small fortune to keep. |
Please create a screen name to access this feature.
Screen name (Select one with 3-12 characters; Numbers and letters only)
Forgot password
Enter your e-mail address below and we will send you an e-mail with a link and code to reset your password.
Password selection
Reset code
New password
Log in & let's get started!
Password
Remember me for two weeksNot a member yet?
Sign up or
Screen name
Select one with 3-12 characters;Numbers and letters only
You will receive an e-mail to validate your account
Password
Make it 6-10 characters, no spacesType what you see in the grey box
If you can't read this,Yes, I would like to receive occasional CNNMoney member updates about new features and special offers.
CNNMoney will use the information you submit in a manner consistent with our . By clicking on "sign up" you agree with and and consent to the collection, storage and use of this information in the U.S. subject to U.S. laws and regulations. ()
For our international users, please be aware that the information you submit when registering for our services is collected in the United States of America. In addition to being subject to our Privacy Policy, the collection, storage, and use of your data will be subject to U.S. laws and regulations, which may be different from the laws and regulations of your home country. By registering for this service, you are consenting to this collection, storage, and use.
We're Sorry!
This service is temporarily unavailable. Please try again soon.
Thanks!
Please check your e-mail and click the link to confirm your membership. Then, you'll be ready to participate in all activities and conversations on our site.
Add comment