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How Do Real Estate Investors Determine a Promising Investment?

Posted by Ken Meyer on Tue, Sep 11, 2012

real estate investors investmentIn today's dynamic market, real estate investors don't have to buy properties hoping that, some day, they'll get their money back. One to four unit buildings in California offer the opportunity for significant appreciation in a relatively short period of time. The secret is to buy the property right, and there are two ways to do it.

Underpriced Properties

Unemployment remains high in California, leading to an ongoing supply of distressed homes. Banks remain motivated to sell those homes quickly, getting them off of their books and helping them avoid the risk of taking further losses. At the same time, traditional buyers still find it hard to find mortgages, preventing them from being able to buy homes from banks quickly enough to get their discounted pricing.

This imbalance creates an arbitrage for real estate investors that either have their own equity or have access to quick and flexible debt, like that provided by private mortgage lenders. These investors can buy good properties at a significant discount from the bank, relist them and wait for a market-rate buyer to appear. This strategy can generate returns in the range of 50 to 100 percent on invested equity.

Properties Needing Rehab

The other opportunity in today's market is for real estate investors to get their hands a bit dirty and rehabilitate damaged or outdated properties. Since it remains a buyer's market, properties that lack curb appeal or that are not even in move-in condition remain very hard to sell. This leads to significant discounts on pricing. When the properties are also bank-owned, the discounts become even deeper.

While real estate investors acquire rehab properties in a similar fashion to the way that they acquire underpriced properties, the process of preparing them for sale is a bit more arduous. The investor needs to build a deal structure that takes into account the fact that they need to hold the property long enough to fix it up. At the same time, they also need to find a way to finance the cost of the additional construction they will do for the rehabilitation. But, at the end of the day, they can expect a healthy return.

With these opportunities available, real estate investors remain extremely active in California. Given that many California markets have historically offered relatively low annual returns, today's pricing is a unique window to grow equity and build wealth.


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