BUY LAND – THEY’RE NOT MAKING IT
ANYMORE
INVESTING IN ATLANTA REAL ESTATE
Mary Anne Walser, Esq., Realtor
404-277-3527
It’s no secret that Atlanta is rich
in real estate investment opportunity. We have experienced a steady rate of
population growth and numerous large companies moving into Atlanta bringing
thousands of workers with them. The only limitation to this skyrocketing growth
might be TRAFFIC – although to date TRAFFIC doesn’t seem to have put the brakes
on people moving to Atlanta at all. So Mark Twain’s advice to “BUY LAND, THEY’RE
NOT MAKING IT ANYMORE” seems very good advice in our city where population is
growing and the demand for housing ever increasing.
So say you want to diversify your
portfolio a bit and invest in residential rental property. I help many do this
and am asked some common questions that I thought I would compile to help guide
others. So think of this as Atlanta real estate investment 101.
First, CAN you invest in rental
property? The best scenario is if you have about $200,000 - $300,000 in cash
that you can pay for a property. If you want to buy a reasonably priced
property that is easy to rent out and likely to appreciate in a reasonably safe
neighborhood, that’s about what you will need. Of course, I help plenty of
investors who don’t have that much cash lying around. You can also get an
investment loan. That allows you to leverage your investment and as long as you
are careful not to get in over your head, given how low interest rates are
right now, that’s an awesome option. The downside to getting a loan to invest
in property is that investment loans carry a higher interest rate than owner
occupant loans, and you will have more difficulty getting a great deal in
purchasing a property because you will be competing with others who ARE making
cash offers. For an investment loan, also, you will still need some cash – a
minimum of twenty percent for most investment loans.
I generally suggest that investors
consider single family properties rather than condos or townhomes. Most
condominiums have rental restrictions under which only 25 to 30 percent of the
units can be rented out at any given time. If all the rental permits are taken,
you are not allowed to rent the unit. So rather than take that chance and deal
with monthly homeowner dues and potential special assessments, with a single
family home you have more control over your property and again – God isn’t
making more land – so the land itself has greater value. The exception to this
advice would be FEE SIMPLE townhomes. If you own a townhome in fee simple, there
are no rental restrictions. You own the ground below the unit, the roof above
it, and you are free to rent it out. Consider the neighbors, however; if they
allow their property to deteriorate, it will directly effect that fee simple
townhome.
Once you have determined if you have
the financial wherewithal to invest and whether you want to consider single
family or condo (or fee simple townhome), the next question becomes WHERE to
buy. In a market downswing, there will be many options for good investment. In
a more balanced market, you have to be a little more careful. Right now, though, just about anything you can
get under $250,000 that is inside the Perimeter on the North end anywhere or
just outside it in Sandy Springs or Dunwoody is going to be a good purchase. I
mentioned traffic – it’s not getting any better. And so close in properties are
rising in value. Properties in that price range are already few and far between
and will be more valuable in the future.
The other area prime for investment
is anywhere near The Beltline. We have seen what The Beltline’s Eastside Trail
has done for properties around it – property values have skyrocketed there! And
“The Beltline effect” has already increased values along the not yet completed West
and Southside Beltline Trails. However, there are still values to be had there if
you’re quick, savvy and have a great agent.
So, you have narrowed down areas of
town and we are out looking at investment property. How do you analyze it? The
first thing we determine is your tolerance for repair. Do you want something
that is ready for occupancy or something that needs work so you can build
equity through labor? Of course the cost of the renovation – which is typically
more than you think or originally estimate – must be taken into account. I usually recommend that a first time investor
without construction experience buy a property that is “ready to rent” without
too much further work. If you do have some tolerance for renovation, carefully
consider the cost in your investment equation.
In addition, it is best to find a
property that will provide steady rental income AND will appreciate in value
over the years. You cannot count on appreciation, so never bank on that alone –
the property must bring in sufficient income to make sense as a purchase on its
own whether it appreciates or not. So once we’ve identified the areas that are
likely to appreciate, we consider how much income a given property will bring
to you as an investor. The Capitalization Rate or “cap rate” is the ratio of the property's net income to its purchase price
and allows you as an investor to compare properties by evaluating a rate
of return on that investment. Here is an example of how to calculate cap rate,
using a quadraplex at a purchase price of $300,000. We have determined from
examining other units rented in the area that each apartment will command $800
per month for rent. So here is how we figure the cap rate:
FIRST, CALCULATE GROSS
INCOME
MONTHLY RENT
= $3200 (quadraplex of 4 units rented for $800 each)
For ONE YEAR
= 12 MONTHS
12 (months)
X 3200 (monthly income) = $38,400 yearly gross income
SECOND, CALCULATE NET
INCOME
38,400
-2,000 TAXES
AND INSURANCE
-5,000 MAINTENANCE & OPERATING EXPENSES
$31,460 net
income
THEN, DIVIDE THE NET
INCOME BY THE PROPERTY PRICE
31,460 ÷
300,000 = .104, or TEN PERCENT cap rate
Now, you can probably intuit the
disclaimers I will put on this information. The net income can be difficult to
figure as your expenses may be higher than anticipated. Maintenance can be a
huge question. A property may need more repair than you know. Bad tenants and
vacant units can be another pitfall – you may get a tenant who defaults or tears
up the unit. There may be several months between tenants before you are able to
rent it out again. (So you may decide to reduce the rental gross income by ten
percent to account for potential vacancies in-between tenants). If you do not want to self-manage your
property, you should include management costs as part of your operating
expenses. Finally, this cap rate example presumes a CASH purchase. If you are
financing the purchase then, of course, you must include the costs of
financing.
Generally, investors consider a cap
rate of ten percent to be a “good” cap rate. You have to make that
determination on your own, taking into account other avenues you have for
investment. Investment in real estate requires some courage and not a small
amount of intuition. But as far as we know, as Tony Soprano said (rephrasing
Twain), God ain’t making any more land – so perhaps it is time for you to
consider buying more of it!
Mary Anne Walser is a licensed attorney and full-time REALTOR,
serving buyers and sellers in all areas of Metro Atlanta. Her knowledge of
residential real estate and her legal expertise allow her to offer great value
to her clients. Mary Anne is a member of the Atlanta Board of Realtors, the
Georgia Association of Realtors, the State Bar of Georgia and the Georgia
Association of Women Lawyers. Contact Mary Anne at 404-277-3527, or via email: maryannesellshomes@gmail.com.
