To any savvy investor, real estate was the tried and true model for consistent return on investment. At least that was prior to the 2008 crash and the chaos that followed. Now terms like subprime mortgages, NINJA loans, and predatory lending have left a nasty taste in the mouths of many Americans shaking their trust and leaving wide open a golden opportunity for people willing to go against the grain. It is true that buying real estate these days takes some real effort. Financing residential real estate takes more than the traditional route of going to your local bank and taking out a traditional loan. Especially if the investor hopes to turn newly acquired real estate into positive cash flow, after all while the housing market has certainly improved there is no shortage of “for sale” signs in the suburbs.
During the early 2000’s the trend in residential real estate was monolithic homes that took up two or three lots gobbled up by developers. The many “McMansions” still stick out in otherwise inconspicuous neighbors, remnants of the unique hubris of owning a large home even if it meant you couldn’t afford to live there. Of course developers made money this way; they also lost their shirts this way in 2007 and 2008 when they could no long sell these homes and the loans defaulted. So like all other times in history were demand falls, supply tappers off, but that demand was simply for huge houses not for housing. Every American still needs a home, and now is willing to settle for lease since they have already lived through the recession. Really average young Americans have to rent, after all banks are simply not willing to give out mortgages to millennials who, unlike their parents, are more and more often being confronted with staggering student debt and a shakier job market.
So then what is left? The answer is simple; invest small, and invest in rental properties. If you want a real positive return on your investment the soundest course to take it to acquire foreclosing and short sale properties from neighborhood banks. Sometimes these properties have a tendency of being beaten up and will require some work to improve them enough to rent, but when compared to building new the initial investment is minuscule. This tactic can allow you to find a property for much less than it’s estimated value and so can turn the CAP rate to your advantage. However, to truly turn a property around and have it cash flow positively requires a very important consideration, more important than even how inexpensive the property was; your market. If you want your newly acquired (formally foreclosed) piece of residential real estate to start producing revenue right away than it becomes important to understand the demographic you are trying to attract.
If you want to take advantage of the new real estate trend, and at the same time maximize your profits, then you should aim small. Americans no longer want the 4,000 square foot brick homes with 5 bedrooms and 3 full baths; they want to live where the utilities are small and the taxes aren’t huge. This trend isn’t just for home owners/ renters; it is all the rage in apartments too. The advent of the “micro unit” (really just a 280 square foot studio) is taking over San Francisco, and New York where young professional would rather be out in the city than staying inside. The mind set of many suburban markets is minimalist too, just the basics, and that couldn’t be better if you are investing in single family homes. After all there are still plenty of big homes on the market, but smaller and older homes are sold much sooner.
So if the hope is to maximize your investment on residential real estate then the strategy is simple: look for foreclosing/ foreclosed properties, invest in distressed properties that can be fixed up quickly, and aim small. A 1940’s two bedroom home can offer more to an investor, even if it doesn’t feel like such a huge return, but the goal is consistency. It better to make consistent positive cash flow than to take a big risk and buy big, and wind up sitting on a property that could have already been rented out if it were smaller. In today’s market the old adage of “go big or go home” could literally not be more wrong.