How to Take Advantage of the Booming Real Estate Market. Yes, Booming

Investing in the booming real estate market… ?

Lest you think I’ve gone totally off my rocker, let me explain. Last night, I received an interesting phone call from an old friend of mine. Jim’s in his forties, has a wife and a couple of kids, and lives in Orlando, Florida.

Six years ago, when I was vice-president of a telecommunications company, I hired Jim to run a new specialty business we were setting up in his neck of the woods. He knew absolutely nothing about our business, but he was a smart guy and I felt he was the best person for the job. It was the right decision, as Jim was a self-starter and turned out to be a great manager for our new operation.

When I left the business a few years later, I suggested he consider striking out on his own, as he would do a lot better for himself. He still owes me a nice dinner for that piece of advice.

Last year, his sales were over $2 million… this year he’ll likely do four times that. He has 10 full-time employees, and he’s going to be looking for more this year. He’s quickly become the No. 1 contractor in central Florida for the type of business he’s in.

Investing in Real Estate - Buying Unfinished Homes

Then he told me something that floored me: He’s taking some of his hard-earned profits, and has been investing them in Florida real estate. Unfinished single-family homes to be exact.

I couldn’t believe my ears. Naturally I asked him how he could possibly be making money buying real estate in one of the most over-built areas of the country. Here’s what he told me:

It’s a simple business model: You buy unfinished houses in existing developments that have other finished homes. These are houses that are anywhere from 25% to 75% complete… hundreds of them. They’re eyesores to the people who live there and financial burdens to the banks that own them.

Many of the contractors that were building these “spec” houses overextended themselves financially. So they simply packed up their tools and left the bank holding an unfinished house. Obviously, the banks are hot to unload these properties first. Terms are simple: 100% cash.

I just paid $28,000 for a three-bedroom 3,000 sq. ft. house. I’ll probably have to dump another $25K - to $50K into it to finish it off. I then put it on the rental market. I usually sign a rental contract within a week.

Jim said because of the high foreclosure rates in Florida, the rental market is doing very well. Also, a lot of people are migrating from other areas like Detroit, in hopes of finding work in the Orlando area.

He did a lot of figuring before he bought his first one, but he told me with the rates he’s charging, he’ll have his upfront money back in a year or two on most of the properties he buys. Then he’s the owner of a very nice house that he bought for anywhere from 25% to 50% of its actual value in today’s depressed market.

Interestingly, the average investor can do the same thing, but in a much easier fashion than my friend Jim’s doing.

Investing in Real Estate With REITs

There are a number of Real Estate Investment Trusts (REITs) that specialize in residential rental real estate investments.

And this week, these funds are starting to see some handsome moves to the plus side. For instance:

• CMG Realty (CGMRX) is up nearly 10% in the past few trading days.
• Third Avenue Real Estate Value (TAREX) is up almost 5%.
• Fidelity International Real Estate (FIREX) is 4.5% to the plus side.

What’s going on here? Simple. Three or four years ago, renters were busy buying houses they couldn’t afford. As a result, apartment owners couldn’t give away apartments, and vacancy rates skyrocketed. Then the housing market collapsed.

Add the havoc in the financial markets to the above mix and you have most REITs trading at a significant discount. Now the trend is reversing itself and it might just be the best time in a decade to own apartment and residential real estate REITs.

Others to consider long term are:

• Avalon Bay Communities (NYSE: AVB) a well-run, low-leveraged operation in high barrier-to-entry markets.
• Essex Property Trust (NYSE: ESS) also operating in high-barrier markets.
• Camden Property Trust (NYSE: CPT) specializing in large apartment complexes.

Watch these plays closely… when they trade sideways for a period of a few weeks or months, consider adding them to your “recovery portfolio.” Next year, you may be very happy you did.

Comments

[walters:]

why do I get the feeling that this sounds like an infomercial and we are not being given full disclosure?

Jan 26 09:08 AM

[t-bird:]

Sure if you have a multi year time frame up to 48 mos. and can buy unfinished properties for under 10 cents on the dollar... you may in fact have some upside at least initially for renters....Especially snowbirds who continue to migrate regardless of the economy.

Main consideration is to have a definite plan to complete the subdivision and plenty of liquidity...

Jan 26 09:28 AM

[Tim Plaehn:]

If you have the cash you can get great deals in the markets hardest hit by foreclosures. Leveraged investment real estate isn't working, but cash buyers can earn 10% per year rental incomes on the cash invested and wait for the markets to recover, even if it takes years.

Jan 26 10:00 AM

[Guero:]

Hmmm, interesting article. I don't think this scheme would work here in central TX, there aren't entire streets filled with unfinished houses on which this plan could be executed.

And I don't know if this means anything, but on a lark I Googled "David Fessler" & "Orlando Fla" to see if I might get a sniff on what this "specialty" telecommunications business might be that his friend is cleaning up on, and turns out that this article is cross-posted on at least a half-dozen other sites. It did have the feel of spam.

Jan 26 10:16 AM

[xmplary:]

If you can buy at the bottom and rent it out, sure you can make money. The problem is not every one has the ability put cash down to get properties at huge discounts and not every one can call the bottom consistently.

Jan 26 10:19 AM

[ferguson:]

I can't help but wonder what business the cash came from to fuel Jim's investments in distressed real estate. Pay Day loan operations are hugely successful in South Carolina. Are they big in Florida as well?

Jan 26 10:25 AM

[notsosmart:]

& you still have to finish the house so you better know what you are doing.renting out to 2 people & then finding out that 10 cousins moved in is another problem.i dont know about fla. but around here its tough to get them out & unhappy tenants leaving can cause a lot of damage on the way out. this article reads like a disguised ad.

Jan 26 10:47 AM

[claudio.lan...:]

i concur completely. not only that but why would i take 2-3% on the big reits listed in the beginning of the article. There are so many other investments which make much better financial sense.
Say for example the recent great article on PM AND MO take a look at those yields. 5.2 and 7.65%. Cue in MO in seeking alpha for the article. I am not long either but seriously considering.

Jan 26 02:05 PM

[Urbane Gori...:]

Well.. Buying fixers, even in a down market can make money. I did. And buying an incomplete **new** home in a **new** neighborhood makes much more sense than buying a used one with unknown problems in a declining neighborhood. Further, the nice thing about tract homes is that you pretty much know what the home is worth very easily by checking Zwillo.com for recent sales. And, if a bank **owns** several of these units in a new complex, they probably have them financed on construction loans, which means that they don't have a lot into them. They should be able to off them cheap and would be eager to do so.This is a good idea. Probably the best I've heard so far when it comes to making money in a down market. Biggest problem would be getting the collateral.

jegan...


On Jan 26 01:20 PM WAKEUP wrote:

> I smell a big, fat rat. If this scheme works so well, why is the
> idea-man so willing to let the secret out? This whole thing reads
> like some script from an intra-company sales pitch practice session,
> in which only best-case outcomes are considered. I don't believe
> it.

Jan 26 03:39 PM

[David Fessler:]

I can assure you that this isn't spam, or an infomercial. Read the rest of my articles and you'll see I don't engage in such silliness. The gentleman I'm referring to used to work for me, and has since done very well. It was a casual conversation among friends that led me to write the article. Nothing more.
David Fessler


On Jan 26 10:16 AM Guero wrote:

> Hmmm, interesting article. I don't think this scheme would work
> here in central TX, there aren't entire streets filled with unfinished
> houses on which this plan could be executed.
>
> And I don't know if this means anything, but on a lark I Googled
> "David Fessler" & "Orlando Fla" to see if I might get a sniff
> on what this "specialty" telecommunications business might be that
> his friend is cleaning up on, and turns out that this article is
> cross-posted on at least a half-dozen other sites. It did have the
> feel of spam.

Jan 27 01:21 AM

[David Fessler:]

This isn't an infomercial, nor are any of the other dozen or so articles I've put on this site. I write financial articles of interest for Investment U and The Oxford Club. Many of them are republished here. Neither I nor my family have any positions in any of the stocks I write about.

Sincerely,
David Fessler


On Jan 26 09:08 AM walters wrote:

> why do I get the feeling that this sounds like an infomercial and
> we are not being given full disclosure?

Jan 27 01:25 AM

[Guero:]

I stand corrected.

Jan 27 11:28 AM

[Kunst:]

I think the author is right. The negativity and cynicism on this board is getting annoying. This is not for everyone, but if you have the means and skills to fix up good-condition, good-location houses and rent them out, I think you will do very well for a considerable time. You don't have to hit the exact bottom. Housing is down a ton. Very few new houses are going to be built for quite a while. If we get a major inflation scenario, as I expect, appreciation will allow some of that "all cash" to be financed out for further uses.

This is the "buy low" time, and the tone of the comments sound like what you hear when everyone has given up.

Disclosure: none, but currently researching similar possibilities.

Jan 29 01:33 PM

[landstuck:]

I have property in the Puget Sound area of Wash. st.. I have a problem that alot of investors, property owners have in these trying days. How can I get around foreclosing on properties that I have enjoyed past relations with. I just so happen to have more than a few homes half built and shudder to think how long on the market they would stay if I have to put them on the block. I could probably get the financing to finish them after foreclosing, but there still is the waiting for the market to turn around. Rentals? What a horror story! I don't have the money or the manpower to maintain 20 or more single family dwellings anymore. Do you?

Jan 30 04:58 AM