This Microsoft Corp sales pro turned part time real estate investor is having to confront the reality of a real estate bubble in his own home town. Here’s what he did…
Throughout his first year as a landlord, Mr. Jones has spent as much energy prospecting new investments as he did worrying about his existing properties.
He’s interested in investing in multifamily units, but after significant research, he’s sitting out of the Seattle multifamily market, he says. Last fall, he looked at a duplex in Seattle’s Queen Anne neighborhood with an asking price of $799,000. To bring in enough to cover monthly expenses plus make a profit, he would have to rent units for nearly $3,000 a month — which makes sense in New York or San Francisco, but not in Seattle. He later found out that the sellers were hoping an out-of-state bidder unfamiliar with Seattle rents would bite.
He’s now eyeing small cities: Tulsa, Okla.; Oklahoma City; Raleigh, N.C.; Cheyenne, Wyo.; Tucson, Ariz.; and Manchester, N.H. He says he wants to make a new investment by the end of the year. His goal is to make a purchase only if he can collect enough rent on a property to exceed its associated costs.
There’s another reason he’s looking at the numbers more conservatively: He’s considering using home equity to fund deals. During 2004 and much of 2005, he had said he didn’t want to take out a second mortgage or home-equity line of credit on his home to finance deals. However, he recently reanalyzed how much equity he holds in his home and learned that because he’s been making extra payments, he can pull $150,000 out of his house to fund deals.
The strategy could put him at additional risk. If he lost his day job, he would still have to write his three monthly mortgage checks (for his primary and two investment homes). He does have a financial cushion, however, given his other investments, he says.
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