As spring 2015 nears it’s merge into summer, it feels like the right time to begin discussing the recent events of real estate investing. I apologize, dear reader, for my recent absence from writing on The Urban Investor site. Due to the increased priority of a new musical project, I won’t be churning out the articles quite as frequently as the “grand opening” of the site. However, real estate discussion is too fun to stay away from for too long, so indeed there will be periodic posts.
The Nashville, TN market is remarkably on fire right now. According to one report ranking The Top Single-Family Housing Markets it is third in the United States, trailing only Denver, Colorado and San Antonio, Texas. But it isn’t only single-family homes that are garnering attention. Music City is teeming with new developments including condos, apartments, hotels, office space, retail and commercial projects. I wrote about my concerns for a potential housing bubble, and I still have those concerns. However, the demand for Nashville property has shown no signs of slowing down in 2015. In fact, there has only been increased demand since 2014, adding more fuel to the fire.
From an active investor’s perspective, it is a wild and exciting environment. I compare the real estate market to the food chain. Hovering around the top are multitudes of hungry home-seekers. They are waiting for new listings of quality houses they can devour. Some are buyers and some are renters. They want to live in Nashville, and they are having a hard time finding the house they want for the price they want. According to CNN, about 82 people are moving to Nashville every day. These folks are growing increasingly frustrated with the limited inventory of rentals and homes for sale. As their searches drag on, they tend to lessen their demands from their initial checklist of what they were looking for. Often they settle for a house that is either smaller, uglier, or not in the location that was originally desired. Or else they elect to pay more.
While writing Part 1 of this discussion, I quickly realized how lengthy it could become. The problem is that there are so many details and variables to consider in this debate. From monthly cashflow, to opportunity cost, to tax implications, the analysis gets complicated. I read through a very thorough article about a similar debate to “Pay Off Mortgage Early Or Invest” on the Financial Mentor site. Many of the points raised in that article are relevant to this discussion, although that debate is about paying off the primary residence mortgage early or investing that extra money into a low-cost index portfolio. The debate I am having here is whether it is better to leverage investment properties and borrow as much as possible, or have no debt. Of course there is a very large range of options in between the two extremes, but if one extreme is indeed better, then wouldn’t it make sense to maximize it to the fullest?
There is no shortage of real estate investing advice that discusses the power of leverage in purchasing properties. Experts talk about how to buy houses with “low down payments,” or even “no money down.” It seems these strategies are sometimes touted because there is a larger market of people who will buy a book about how to get started investing with little money. After all, there are more Americans who barely have any money saved than the number of Americans who would buy a book about how to buy houses with, “cash savings over $200,000.” However, if an investor can borrow money at 4% and get a return of 14%, why wouldn’t that investor capitalize on using other people’s money and maximize profits?
Meanwhile, there is another group of financial experts (Dave Ramsey being one of the leaders) who advise against having any debt at all, including real estate. The thinking from this group is, “Why lose 4-5% by paying interest to a lender when saving the cost to borrow can directly increase profits?” I find myself thoroughly understanding both sides of the argument, but unable to decide which approach is better.
I remember having a conversation about nine years ago with a very wealthy individual about what neighborhoods would have the best future appreciation in the local real estate market. She replied, “That’s easy, the same neighborhoods that have always had the best appreciation.” I nodded my head in agreement. It seemed like the perfect answer. But there was something in me that didn’t totally buy in. If neighborhoods appreciate at the same rate they always do, then how are gentrifying neighborhoods with rapid increases of home values explained? What causes the exceptional upward momentum of rising prices?
By the time I had that conversation, I had witnessed several neighborhoods in Nashville, TN experience rising property values that did not line up with their historic appreciation rates. They were beating their previous track record. Those neighborhoods had been undervalued, but began over-performing to compensate. Renovations were being completed by homeowners and investors alike. As more dollars poured into the improving neighborhoods, others took note and wanted to buy in as well. Activity furthered more activity, and successful flips led to more investment projects. I watched with a desire to understand what market forces were at work. And I began to anticipate what neighborhoods might be next. I knew that being able to identify undervalued parts of town would be key to future investment success.
I recently read a book titled, “The Great Depression – A Diary” by Benjamin Roth. It is the first-person account of a 38 year-old lawyer living in Youngstown, Ohio during The Great Depression. The book’s summary says, “After (Benjamin) began to grasp the magnitude of what had happened to American economic life, he decided to set down his impressions in his diary. This collection of those entries reveals another side of The Great Depression—one lived through by ordinary, middle-class Americans, who on a daily basis grappled with a swiftly changing economy coupled with anxiety about the unknown future.”
Much of the book’s content deals with the local and national economy, stock market, and politics, but Roth kept an eye on general investing and real estate as well. The following entry was dated September 24, 1936:
“To build an estate it is necessary first of all to get money by saving it and secondly it is most important to invest these savings so that they will increase and work for you without losing the principal. Most people learn the first rule and succeed in saving various amounts out of their earnings but very few learn the second rule – how to invest it so it earns a profit and yet not lose the principal. It follows then that it is most important to learn how to invest money and make it work for you.
As a real estate investor, I tell people in the business that I am always buying. What I mean is that I will consider any property that is available for purchase, and if it seems like a good deal, I will make an offer. If it is a great deal, I won’t hesitate. Some sellers want too high of a price based on the location, size, and condition. I don’t waste time making an offer when their price and my valuation are too far apart, but I still think through the possibility. I like to contemplate lots of deals, because essentially nearly every property is worth buying at the right price. I know I can’t buy everything, nor do I want to. But analyzing hundreds of deals and thinking through the numbers is something I have practiced so much it is almost automatic. When a property comes along that is priced well below the market value, I can spot it quickly and it is a simple decision to buy. It’s easy to point to the great deals that I have purchased over the years and think they are the reason my investing career has succeeded. However, another factor is just as important: being able to turn down a deal when the numbers don’t work.
I usually have a real estate transaction every few months. I get used to the rhythm of buying and selling. Sometimes, like in the fall of 2012, I bought two houses in a five week span, and three in three months. But other times a few months goes by without any
Over the past few months I have asked the question, “Do you think Nashville is experiencing a housing bubble?” to several respected individuals involved in real estate. After talking to a banker, appraiser, commercial broker, realtors, wholesalers, and other investors, the responses have been quite varied. Some seem to think that Nashville is just beginning a growth transformation that isn’t going to stop anytime soon. They believe that with continued population growth continued housing demand will follow. And as long as there is steady demand, prices will justifiably appreciate.
While Nashville’s economy appears to be healthy, others I talked to are concerned that the national economy isn’t very strong and will eventually weaken Music City’s real estate. Many of the home buyers are moving to Nashville from California, New York, and other higher priced areas. Their money goes farther in the mid-south, buying bigger and better houses than coastal options. But any type of dip in the national economy could impact the out of state dollars that have added fuel to Nashville’s housing fire. Even if Nashville’s local market sustains its growth, it isn’t immune to unfavorable outside forces.
I received a phone call yesterday from a wholesaler in Nashville, TN who said he had just gotten a house under contract and asked if I was interested in buying it. He told me the address, price, and a few facts about the property. The location in East Nashville is close to two other rentals that I own, so I was very familiar with the particular street and the surrounding area. It seemed like it could be a good deal, depending on the condition. I knew he had other investors that he was talking to, so I didn’t hesitate to check it out. Within fifteen minutes of the phone call, I was knocking on the front door.
The quick purchase, wholesale house
An intriguing property was recently listed for sale on the MLS in Nashville, TN, just a tenth of a mile from the popular Riverside Village in the Inglewood neighborhood. The house, built in 1930, is over 2400 square feet and has charming historic character, but the land (.8 acres) at 1424 McGavock Pike, may offer more value. Priced at $299,900, this property provides several profitable investment strategies, but raises several questions as well:
Existing house vs. teardown?
Current zoning vs. zoning change?
Residential vs. commercial?
Existing lot vs. re-subdivision into smaller parcels?
What is the highest and best use of this property?
1424 McGavock Pike