Jim Gregory knows a good deal when he sees it. Having built almost a thousand homes in good times he pulled in his horns when he saw things getting overheated in the middle of the last decade. It wasn’t too hard for him to be patient as he had just finished building his dream sailboat and wanted more than ever to explore the Caribbean. And this is exactly what he did, but not solely.
You see Jim wasn’t just a vagabond. At almost every lull and port he would read the news and make calls. He checked on sales activity and prices of finished homes and condos, looked at material costs and interest rates, and studied the economy and prioritised which industry segments and regions might offer the best opportunities.
Income properties made the top of the list, and the overbuilt Phoenix area stood out as the place where some of the best deals could be had. Jim reckoned that in spite of the temporary overbuilding many people still desired an affordable home in the warmer climes. He saw the ability to earn not only high current rental income but also to position for long term appreciation as the market slowly absorbed the current inventory.
By early 2010 Jim had identified a few target properties. One of these was Biltmore Square, a 360 unit Class A condo project built and sold at the top of the market in the 2005 and 2006 time frame. Across the street from a park, close to hospitals and businesses, and not far from downtown it had a lot of growth potential.
The problem opportunity was that many of the units had been sold to speculators who dumped them on the market when the downturn began. One and two bedroom units, that had been selling for around 200k and 250k respectively, could now be bought at auction for roughly 50k and 70k respectively.
Jim likes to build from scratch but when he saw he could buy foreclosed units for less than half of what it would cost for new construction he became a regular at the auctions. For most of 2010 and early 2011 there was little competition and the prices were incredible.
The typical scenario involved paying all cash on a quick close, with Jim then leading a small team to upgrade the units with new floors, granite counter tops and appliances, plus crown moldings and enlarged entry ways. All this could be done for about 6k to 7k per unit because materials and labour were available in abundance. And Jim didn’t hesitate to make these improvements because he knew that if had the best units in the project his would rent quickly, and they did.
This visionary man and his friends have now picked up their 30th condo in this project and are realising cash on cash returns of about 10% to 11%. Returns could be a good bit higher, if the market comes back to replacement cost levels, but in a 1% money market world, they are happy just holding for income.
Alas, Jim says things are beginning to change. Instead of just a few people at the auctions there is now often a small crowd bidding for the units, and prices have increased across the board since the lows of last year. He sees a small boom in the works and notes the local Home Depot parking lot is almost twice as busy as it was a year ago and it’s getting tougher to find great deals on materials like granite slabs.
Gregory doesn’t know how long the upturn will last but he likes the fact that the demand for new housing units continues to grow while new construction continues to lag. In his words, “As long as this lasts, the wind is at our back”.
At this writing Jim and his wife are planning another Caribbean adventure while continuing to accumulate a nice portfolio of rental properties at attractive prices. Not a bad way to set your sails.
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