InvestmentProfitable Investing in a Changing Charleston Property Market

We all get carried away by mantra from time to time.   “The Charleston SC marketplace is buzzing – such a great place to invest in real estate ” would be a commonly heard cry.  But be careful. Our advice?  Be very careful.  Many Realtors do not understand the correct meaning of “investment ” and think it means, “buying their product. ”  A second home that costs more to keep than it earns is not an investment it’s a lifestyle choice. There is certainly nothing wrong with that, but it is unwise if you believe you are benefiting from that second home as an investment.  So having thrown down the gauntlet, “What is a good investment? ”

That really depends on where the market is at any particular time and an understanding on where it is likely to go in the near term.  Something that earns a cash return greater than the cost of ownership (mortgage, taxes, insurance, maintenance etc.) would be good. Something that earns cash greater than ownership AND creates increasing equity value in the process would be better.  So what are some simple tips to apply as a filter?

Lets start with the cost of capital.  If you are lucky you will qualify for a Fannie Mae type home loan at low interest and long amortization period.  Most of us though, obtain commercial loans, still can be had at good rates, but not quite as good.  A 20-year AM and 4.5% interest loan from a local bank will gross at about 7% of the cash borrowed in terms of cash flow in repayments.  So your investment property had better make in excess of 7% after all costs – insurance, management, repairs, idle time etc. 

There was a time in the recent past when buying low cost dilapidated homes downtown, renovating them and renting out would achieve that and more.  But house prices have risen faster than rents so that is no longer the case.  There was a time when vacation rentals for a downtown home gave a very good return but that is changing also in that asking prices have risen sharply and the city is scrutinizing those that may be operating outside of what permitting allows. As such, the rental figures cannot be used to justify the loan with the banks even if the city does not catch you firstly. There was a time when banks would sell repossessed properties at 60% or so of full market value allowing them to be renovated and flipped at a profit, again as the supply has tightened that opportunity has gone. 

So this leaves less choices for the investor with cash to spend today.  There is a good case for buying downtown if you have a child in college and want to make better use of the rental costs provided you have the resources to raise the mortgage.  If you desire a second home in Charleston and want to rent monthly when you’re not using the home, again there is a case to be made as rental income will substantially subsidize the cost of ownership and you can gain from a general increase in value over time. 

HOWEVER – and this is a big point – the smart investor does not follow the herd.  They look for the odd and unusual opportunity.  They look to build in equity at the outset by renovating or creating from new, by adding additional dependencies on the grounds or by re-purposing buildings. They look for new opportunities where the development wave has started but not yet matured. They look for opportunities with an upside much greater than that 7% threshold, then seek to minimize their risks with local skill sets to design, build and manage the properties profitably.  Those opportunities are out there but it takes local knowledge and the ability to review the whole real estate cycle not just the immediate property purchase. Is this in fact real?  We consider perhaps 4 or so every month that pass our desks. When evaluating real estate investment opportunities of our own, our filter is a return of 12-15% cash-on-cash, though often there are other factors to consider beyond that.  So yes, we know it’s real and achievable. 

It’s this thinking, and the ability to manage financial risk, that separates the true “Investor ” from what is more accurately described as a “Buyer ” and turns an average return in to a great one.  

NOTE: Click below if you want to explore more about investing profitably in this marketplace and to understand how we may help you achieve that goal. Our knowledge of viable investment opportunities that exist in the Charleston real estate market come simply from our experience and the successful real estate portfolio that we own and manage.