We met with some interesting people last week, well two different groups really. Both had the same basic idea which was that investing in real estate in the Charleston marketplace was seemingly a "good thing". Our conversations basically developed from that assumption. We'll refrain from throwing the discussion too wide here and just concentrate on real estate investment assuming that all other considerations are irrelevant for the purpose of this discussion.
First of all this is a medium to long-term play, say 3 through 10 years. A shorter play would be what we typically class as a "flip" and thats the subject of another discussion. This is a buy and "hold for a while" type of deal. Next we need to consider the returns.
1. The investor will have a return in terms of "cash flow" - that is the return of rental income achieved on the property. If the property is purchased ready for rent then those returns will typically be between 6 and 8%. That is a Capitalization or "Cap rate" of 6-8%. There are many examples of investments available on the MLS that will achieve this. However, if you borrow money from a Bank to fund the investment then a 4% borrowing rate and capital repayments will eat into this return substantially as will repairs, management, insurance and City costs. Anything below about 8% is not really viable unless it is a cash purchase.
2. There is an equity return that can be achieved over and above cash flow. This is value added after the purchase or property inflation due to increased assessed value or general rise in real estate prices in the area. Our own internal investments assume a general inflation of about 3% for the basis of estimation. If we build from new downtown, or substantially renovate using our own construction crews, then add an additional 15% uplift on completion of the work.
Add 1 & 2 together for say a 10-year investment and you get 1.5% annually from the renovation, 3% from inflation and 8% cash flow = 12.5% annual return overall. The project is now looking more reasonable.
Not everyone has a Construction company, or a Real Estate arm, so the buying choices for viable deals are more limited. We have invested in many areas around Charleston and the strategy has changed substantially as the market has improved. Targeting when and where is part of what we can help you with, as well as making introductions to banks and funding sources to help you make those investment property deals become reality and making that cash go farther.
In the next article we can speak to returns in more detail and how we have changed strategy for targeting our own investment funds for the Tri-County area.
Come see us and find out more about our real estate investment strategy - the coffee may not be great but the conversation will be like no other to be had on Broad St!
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