Today I talked to a California real estate investor who is buying 'deals' in the Austin, TX area. When I found out where they bought I thought they had gone nuts. I wondered how they knew the local real estate market so well and manage it all from a distance. I guess if you live in California, everything in TX looks like a steal. They typically buy brand new entry level homes that are built in pastures outside of Austin that have been converted into subdivisions. Cheap, fairly large homes at $50-70/sqft. The converted pasture land is of negligible value at 0.1 acre. The areas are being excessively overbuilt now.
The idea is: 20% down. Rest is mortgage. Builder issues a 1099(
) as a commission type deal for a rebate which reduces the out of pocket down to 10%. The investors expect the homes to appreciate by 3-8% per year. (That 8% seems to be complete bogus to me, I think some of these areas will go through some depreciation). The rent will take care of all annual cost incl property manager until they sell it. With the 1099 kickback, it seems that appreciation in the very low single digits would still work for these folks. So if you buy a $100K house with 20% down, assume a 10% kickback and a 4% measly appreciation per year for 5 years, you would still make $20K with only $10K. I guess this sounds so good that they are just scooping it up regardless of where it is.
The latest house they bought in Texas, was also a 'great deal' somewhere at a lake - they just could not even remember the name of the lake any more......