From about the mid-1990s up until the housing bubble burst, Arizona’s economy was driven primarily by the real estate industry. During those years, high population growth and lax credit standards resulted in a booming housing market. This boom created a need for more real estate-related jobs (real estate agents, construction companies, title/escrow agents, etc). This also became an attractive market for property investment companies. These investors flooded the market buying up property left and right. This ultimately led to inflated home prices, which played a big role in the bust that started in late 2006.
Fast forward to today…It is late 2010 and over the past 4 years the effects of the housing collapse are evident. The market has definitely changed, but those real estate investors (who are not shell shocked) are seeing great opportunity. It is time to shift the mind set of the investor. Investing no longer can be based solely on speculation. An investment opportunity needs to produce cash flow, which provides a monthly passive income for the investor. There are other advantages; however this article will focus on the impact property investment companies have on the cash flow investor.
The first step is to understand the different types of property investment companies. There are 3 main categories; property wholesalers, rehab specialists, and private equity funds. It is important to understand the services these companies provide and how they impact a cash flow investor’s profitability.
Property Investment Companies: Property Wholesalers
With the increasing supply of distressed real estate, there have been a number of property wholesale companies entering the Arizona market. These property investment companies purchase property at a discount, then wholesale (or flip) the properties to an investor at a higher price. Typically, wholesale companies are purchasing short sales, bank-owned (REO) properties, or properties at trustee sales. Anywhere they can buy at the lowest possible price and resell for the highest possible profit. Generally, the properties being sold by wholesale companies are ‘as is’. This means that they will not be doing any improvements to the property, which could be a disadvantage for the buyer.
Impact on a cash flow investor: There can be advantages and disadvantages to working with a property wholesale company. Some of the advantages could include acquiring a property at a price below market value, since many companies try to purchase at 50 or 60 cents on the dollar and sell for 80 cents. Also, property wholesalers are typically dealing with properties under $150,000, so cash flow investors are investing a smaller amount of capital with the potential for higher returns. A disadvantage to working with a property wholesaler is not knowing exactly what you are getting, in terms a property’s condition. As mentioned earlier, the properties are generally sold ‘as is’. This could mean more capital is needed over and above the acquisition cost. Without having a quality estimate of that additional cost, it could definitely impact the cash flow investor’s return.
Property Investment Companies: Rehab Specialists
Rehab specialists, more commonly known as fix and flippers, are property investment companies that purchase property with the intent to improve and sell for a profit. As with property wholesalers, the Arizona real estate market has seen an increase in rehab specialists. The distressed property environment is fueling this growth. Companies are able to purchase property at a discount, rehab, and sell to buyers looking for a move-in ready home. It is important to review the quality of the rehab work, as there are good and bad rehab specialists. If the work is not done well, then more problems can arise for the property buyer. property investment tool
Impact on a cash flow investor: There are several advantages to using a rehab specialist; however there are also some disadvantages. A big advantage is that a rehab specialist can provide a cash flow investor with a turnkey investment property that is ready for a tenant and has the potential of quickly generating monthly income. These properties may require a bit more capital at acquisition and priced a bit closer to the actual market value; however shouldn’t have additional rehab costs. One disadvantage is if the rehab specialist did not do quality work, which could require additional expense to maintain the property. It is important to always ask for references. A reputable rehab specialist will have a portfolio of completed projects they can provide to investors.
Property Investment Companies: Private Equity Funds
Private equity funds are quite a bit different from the other 2 types of property investment companies. They build capital from many investors with the goal of acquiring property and returning a monthly cash flow over a set period of time. A private equity fund is approved and regulated by the Security and Exchange Commission (SEC) and each individual fund sets its own investment terms. They vary based on property acquisition, return percentage, and length of the investment. The fund is controlled by a group of fund managers, typically the principals of the company issuing the fund, and not by the individual investors. There have been some past challenges with private equity funds stemming from misuse of funds, improper capital allocation, and poor asset management.
Impact on a cash flow investor: Private equity funds can offer advantages to cash flow investors who are only concerned with the return and do not want to deal with acquiring the property. There is typically a minimum capital investment with these funds; however in most cases it is cheaper than purchasing an actual property. With a collaboration of capital, a fund has the ability to purchase larger pieces of real estate with the potential for higher returns and develop a larger portfolio of property providing diversification to the investment. There are also some disadvantages to private equity funds. A cash flow investor would have no control of how the fund is managed or what type of property the fund is acquiring. An investor will get a prospectus that outlines the terms of the fund. Also, it is important to research the principals involved and make sure the fund has filed the appropriate SEC documents.