Realty411 Magazine Featuring OCG Properties - Part Two | Página 22

Blue-Chip Real Estate Strategy
Fits Economic Climate
by Ryan Hinricher, co-founder of InvestorNation.com
This article originally appeared on BiggerPockets.com
T
he housing recovery is
limping along slowly
leaving many real es-
tate investors wonder-
ing where to invest their dollars.
Some speculation is even re-
turning to the market with new
investors looking to purchase,
renovate, and resale distressed
properties for short term profits.
Owning a real estate investment
brokerage allows me to see a va-
riety of transactions, including retail flips
from speculators, investors buying $8,000
homes, renovating and placing tenants in
them, and a higher quality purchase and
hold homes closer to median home prices.
The latter is a strategy that I believe right
now is being overlooked by many inves-
tors.

The Product
There are many markets where you can
purchase and hold homes at the median
or even average home price and receive a
positive cash flow with a traditional 20%
down strategy. These homes, are out-per-
forming many lower-priced homes from
rental prices and home values perspective.
Median-priced homes in most markets are
three bedrooms, two bathroom homes,
which offer good car storage. Usually this
is the type of home most Americans desire
to live in ensuring you always have both an
available rental pool and an available buyer
pool. This product offers real estate inves-
tors multiple exit strategies with the ability
to sell it retail versus lower-end properties,
which usually need to be sold to other in-
vestors.
In addition, median-priced homes are
usually in areas low in crime, close to
schools, shopping, houses of worship, and
with easy access to employment. The in-
verse of this is, of course, also true. I per-
sonally own properties at much lower price
points as well. They took the hardest hit
on rents and value. This is where I’ve seen
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a lot of investors get
in trouble. The lower
priced homes usually
have households with
limited to no savings
or emergency fund. So
when a tenant loses a
job, the property owner
feels that impact pretty
quickly. Also lower-
priced homes tend to
be in older areas giv-
Ryan Hinricher
ing the owner a much
higher rate of maintenance.
The Numbers
This is where investors usually make mis-
takes. The surface numbers can be very
deceiving in real estate. When analyzing
a real estate transaction
many investors aren’t
using vacancy and main-
tenance, or applying the
same vacancy and mainte-
nance numbers to homes
that vary widely in price,
age, neighborhood, size
and city. This can cause a
pretty big disappointment
when the cheap property you purchase is
affected by socio-economic issues leading
to high tenant turnover, criminal element,
slow-paying tenants and maintenance is-
sues.
I’ve seen many people advertise profor-
mas with high cash flow on smaller, older
homes in areas with high crime, poverty,
poor schools, and with low rates of home
ownership. One can argue that these can be
good investments structured correctly and
by applying the right metrics to ensure a
more accurate projection of cash flows is
achieved. These lower-end properties have
become the penny stocks of the real estate
investment business. If you get the perfect
tenant who doesn’t feel the pains of the
recession, maintains the home themselves
and stays in the property for a long time,
you could hit pay dirt. Similarly if you’re
PAGE 22 • 2010

well-versed in Section 8 you can profit
greatly in the lower-end homes.
The median-priced home becomes the
blue-chip property. The blue-chip home
has lower levels of vacancy and rents that
have been buoyed by average people be-
ing displaced from their primary residence
via foreclosure. In the market where my
company is located, average-priced homes
are selling for around $115,000. Obviously
with distressed inventory out there, one can
purchase properties at lower prices than
this, improve them and probably have eq-
uity that is more tangible than lower-priced
homes. How can one possibly model a
$115,000 home the same way as a $30,000
home? The $30,000 home (in most cases)
will have significantly higher rates of va-
cancy and maintenance.
If you go up a step to
the higher-than-average
priced homes, you’ll no-
tice those homes might
offer stable tenants, usu-
ally high-end profession-
als who will reliably pay
the rents. The cash flows
may look lower on the
surface than other types of
homes but these blue-chip homes perform
more reliably on maintenance, vacancy,
and valuations.
Financing
Financing on blue-chip homes tends to be
much easier than most any other price point
for a number of reasons. First because the
prices are low enough you don’t worry
about jumbo loan pricing, rates, and re-
strictions. On the lower end not all lenders
are lending on homes priced under $50,000
and at times have a different rate table. In
and around the median price nearly every
lender offers investor loan products. I’ve
also found the appraisal issues are fewer
because normal sales activity exists at this
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