Last week we reflected a bit on the returns that an investor could or should target to stay healthy in the Charleston, SC real estate marketplace. We also looked in brief at how those returns are constructed in terms of cash flow, inflation, and equity. Moving on from that we’d like to discuss a few investment examples from our own experience as illustration of how it all works as what we would describe as an “Equity play”. Our parlance but I hope it has a meaning for the reader.
First let's move across the Cooper River to Mount Pleasant. A community that has seen considerable growth and development over the last 15 years. This area includes many master-planned, middle class communities, good schools and local amenities. As a result of this prices are robust by local standards and there is a good rental market. We have made three investments in this area, purchased roughly two years ago as distressed sales and one Bank owned. the market in 2012 was starting to move, inventory was on the decline and the abundance of bank repossessed properties were being bought up, mainly by investors. The reason for this play was that funding from banks was still quite tight and the chances of an individual obtaining a loan to fund purchase of a repossessed property were low. This was what we would consider an equity play. Properties were purchased with the expectation of selling in a few years. In the mean time basic repairs were made, kitchens upgraded and general decor enhancements completed. Those expenses were around 5% of purchase price so considered modest. The properties were rented for a period generating 6% or so, not great in itself but it was not a long term play so this was a holding action. All will be sold by the end of this year and their funds reallocated. The market in Mt Pleasant has now changed. Rental properties are still available that will produce a good solid return but the opportunities for an Equity play are greatly reduced.
Return back on to the peninsula now, to the Ansonborough neighborhood. A good high-grade historic downtown neighborhood. Again, our property was purchased nearly two years ago. In this case from a highly motivated seller. A wealthy gentleman whose life had moved on away from Charleston. A holiday home was no longer needed, it had good bones but a lot of deferred maintenance. A cash offer secured the property, $250K of renovation investment turned it in to a stunning Charleston Single with unattached kitchen house. Again, we rented for 2 years but here is the rub - rents will only go so far. This was an expensive home with expensive insurance and expensive city costs. Returns were very low, only just in the black. The same investment placed in the Eliottborough neighborhood would produce a much healthier return, even at today's house prices. This rapidly turned in to an equity play. In the current real estate climate it was sold to a good investor who wanted a safe haven for his cash and access to the home for their own purposes. We locked down a very good uplift in price from the extensive and sensitive renovation and a little inflation. We now manage the property on their behalf, a good outcome all round and happy client ongoing.
So, these are two examples of how an equity play has worked for us. In the next featured article on investment we will touch on a "cash flow" play or, in other words, a good real estate investment bought at market value and ready for the rental market.
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