42,249 – Is that a big number? I guess it depends. Aren’t numbers supposed to be relative? If you’re buying a house in Phoenix $42,249 doesn’t sound too bad. But if you’re purchasing a Honda Civic it sounds a little pricey. Approximately 42,249 new U.S. jobs were created in October. That sounds promising. But what if told you that on this day, December 16th, 2010, 42,249 homeowners are in foreclosure in Maricopa County, Arizona?
566 – Not a huge number right? $566 will buy you a fancy 40” high definition TV. A pretty good deal considering I paid $2,100 for mine just three years ago. However, if 566 people were ahead of you at the motor vehicle division wouldn’t you want to cry? It just so happens that 566 homeowners were foreclosed on today in Maricopa County, Arizona. To put this in perspective back in 2005 when I was following auction sales about 500-600 homes were sold a month at the courthouse steps.
So where are all of these homeowners going to go? Where will they live? Many of them will move back in with their parents or other siblings. Some will move out of town. A small number will rent an apartment. 1 out of 5 of them is an overextended investor so they don’t need a place to live. What about the rest? They will undoubtedly look for a single family home to rent, preferably in the same neighborhood they live in now.
Consider this hypothetical scenario for a moment – I’m an investor with $100,000 in a traditional IRA account earning me 7% interest annually. Unhappy with such an average return I roll the $100,000 into a self-directed IRA account and use the money to purchase a single-family home in Peoria, Arizona. I rent the house for $950 a month and net $775 after paying taxes, insurance and HOA fees. That’s a 9.3% cash on cash return. Not bad.
Okay, I know. You didn’t come here looking for hypothetical scenarios. You want real world examples. Well, here you go – I recently represented an investor that purchased a single family home in Maricopa, Arizona. It was a bank owned home we found on the multiple listing service. He paid $82,000 and made $5,000 in repairs. He put $24,000 down and financed the rest. He rented the home immediately for $850 a month, netting $400 a month in cash flow. The cash on cash return is 16.5%.
Here’s the best part. He’s depreciating the home over 27.5 years earning another $2,500 annually in tax deductions. This asset serves another purpose as well – an inflation hedge.
It’s a rather simple formula but it amazes me how many investors screw this up. Renters want single-family detached homes – not condos, townhouses or attached dwellings. Renters, especially those with families, want at least 3 bedrooms with a den, a two car garage and a finished backyard with grass. Most importantly, they want to be close to schools, shopping and freeways.
Renters don’t want to commute so stay away from the far out areas like Buckeye, Queen Creek and Maricopa (even though my investor client bought in this area I’m still not a fan.)
So do you feel ready now? Not so fast. Do your homework. Connect with real estate professionals and investors that have similar goals. Ask questions – lots of them. And remember what Warren Buffett once said, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”