NUTS & BOLTS THE BIG PICTURE
STRATEGIES: REITs CAP ATES
tially in value over the past three years, and we could refinance and get all the cash back out that we put in several years ago. That’s an ap- pealing option because then we could continue to build our portfolio. The question is: Where would we buy today? It’s getting harder and harder to find deals like these were, so we’d likely have to accept a lower cap rate and expect slower appreci- ation. No matter what, we want strong cash flow and appreciation, so we are looking in the path of progress in two specific markets: Detroit, Michi- gan, and Florida. These days, Detroit is starting to look a lot like Cleveland did in 2013. Thanks to a couple of billionaires investing approximately $2 billion
and a duplex in Pittsburgh, Pennsylvania.
INVESTMENT #1 CASH FLOW IN CLEVELAND We bought the Euclid property for $31,000 and had it renovated for about $25,000, putting us “all in” at $56,000. It rented immediately for $950 a month and we have had the same tenant ever since. We love that tenant: not one late payment! Unfortunately, we did not love our prop- erty management quite as well. The initial manager quickly got in over his head, trying to manage too many properties and using rental incomes to cover overhead. Soon, we noticed that even though our tenant was paying on time, rents were coming in more slowly than normal. We changed property management companies immediately and got back on track. We lost a couple months’ rent and the deposit from that ordeal, but the cash flow since has more than covered those losses. Lesson Learned: Stay on top of your property management company and react quickly at the first sign of problems or you could get burned. We have found that mom-and-pop operations who plug into larger franchises are able to manage their business much better because they have access to more resources, systems and tools they couldn’t afford on their own. INVESTMENT #2 PITTSBURGH DUPLEX In Pittsburgh, we found a duplex for just $55,000 right across from a new Hollywood film studio and the new CSX rail site. We renovated the property for approximately $30,000 in upgrades and were all in at $85,000. The property rent- ed for $550 on each side with a five-year lease to a father/son team. They have never been late and there have been no repairs required during that time. Fortu- nately, that property has not come with any other issues either, so far.
WHAT’S RIGHT FOR RENO?
R eno’s dynamics (tight inventory, growing jobs market) remind me of when
Rich and I first started investing out of state back in 2004. Home prices in California were already way past affordability levels at that time and cash flow in area rentals was definitely negative. We discovered the
massive job growth in Texas, so we refinanced our California properties and used the cash to buy eight brand new homes right in the path of prog- ress in Dallas, Texas. The cash flow was quadruple what we could get in California, and home prices were so low they held up during the mortgage meltdown of 2009. However, I’m not convinced this is the right route for Reno. Since cash flow is not presently particular- ly strong there today, a buy-and-hold strategy is not as attractive. Building and development, however, is extremely attractive because the local inventory is so limited, and we’re already involved in this facet of that market. Stay tuned to learn from our experi- ences in that process sometime in the future!
Capitalization rate, or CAP rate, is the ratio of the Net Operating Income (NOI) of a property to the value of the property. If a property is valued at $100,000 and has an NOI of $10,000, then its CAP rate would be $10,000/$100,000, or 10 percent.
Real Life Case Studies:What’s NextWhen CAPRates Compress LEVERAGING YOUR SUCCESSFUL INVESTMENTS WHEN MARKETS SHIFT.
each into downtown Detroit, the area has completely transformed in just a few years. While Detroit faced bankruptcy just a few years ago, its balance sheet is stronger and holds far less debt to- day, creating a situation in select neighbor- hoods where we hope to get both strong cash flow and steady appreciation. Parts of Florida also offer opportunity. Prices in those areas have increased sub- stantially, but they have not bounced back to their 2006 highs yet. Rental housing de- mand in those areas is also strong. Thanks to higher home values in Florida, however, we know we will need to accept a much lower cap rate there than we’d get in Detroit.
by Kathy Fettke
pletely and start developing investment properties instead of just acquiring them. That type of investment is perfect for an area like Reno, Nevada (see sidebar). Tesla is building its battery factory in the Tahoe Reno Industrial Park - reportedly the largest of its kind in the United States. Amazon, Switch, Google and Toyota are also setting up shop there. 10,000 jobs are expected every year, but new housing is not keeping up with demand. •
ing major growth after both cities invested billions of dollars in revitalization efforts. Cleveland was becoming a world class medical hub with the massive Cleveland Clinic, the new Global Center for Health Innovation, and several medical univer- sities nearby. Pittsburgh was becoming a high-tech hub, was second only to Holly- wood in film production, and was (still is) home to several major universities. Despite all this growth, properties in those areas could be purchased for next to nothing in 2013 due to the foreclosure crisis. We decided to invest in both places. We ended up with a house in Euclid, Ohio (above), which is just outside of Cleveland,
ust five years ago, right after the Great Recession, inventory levels
Fettke, and I wanted to buy more income property. Values in California, where we live, had already skyrocketed, so it was tough to find cash flow locally. In fact, if you bought anything in California between 2009 and 2012, you probably tripled your equity if you held it! However, those dramatic price gains killed cash flow. We continued to buy in California for appreciation, but we did so knowing that was a far riskier play. We wanted to diversify into a market with double-digit cash flow but, being Californians, we could not forego potential of equity growth. At the time both Cleveland, Ohio, and Pittsburgh, Pennsylvania, were experienc-
were high and home prices were at their lowest. Fast forward to today and we are ex- periencing quite the opposite scenario: low housing inventory and high home prices. Different market cycles require different strategies, and experienced real estate inves- tors all have their own stories to tell about the great deals they’ve acquired in both up and down markets. They probably also have stories they never wish to tell about how things didn’t go so well. In the hopes that you can learn frommy successes and my mistakes, I’ll share both kinds of story. Back in May 2013, my husband, Rich
Kathy Fettke is the co-founder and co-CEO of Real Wealth Network. She may be reached at www.RealWealthNetwork.com.
NOWWHAT? Both properties have increased substan-
OTHER OPTIONS We could also change strategies com-
36 | think realty magazine :: december 2017
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