The Pursuit: Investing in Anacostia

• December 10, 2012
• 6 Comments

by Shilpi Paul

Paula Wu, right, and her agent Megan Markey. Photo by Porter Watkins.

When Paula Wu was looking to invest her money, she knew that she wanted it to be some place safe. The recent California transplant felt that the stock market was unpredictable, but that DC’s real estate scene was growing, with many areas showing steady appreciation.

“Compared to a stock, real estate is transparent,” Wu told UrbanTurf. “I can choose where to buy a property, the tenants who will rent, how I manage it — I have control from start to finish.”

Wu, who moved to DC in 2011 and lives in Bethesda, started researching various neighborhoods across the area, looking into real estate appreciation data as well as crime statistics. Like many in the city, she saw much of the investment moving eastward across the Northwest quadrant of DC, but the neighborhood that caught her eye was across the river: Anacostia.

“It didn’t have the best reputation, but appeared to yield a good financial return,” Wu said of the area. The crime statistics were also comparable to many wealthier parts of the city, Wu told us, leading her to believe that perhaps the reputation was more stigma than reality.

A kitchen in one of Wu’s apartments.

Still, she was interested in minimizing as much risk as possible. After more research, she learned that some landlords in Anacostia (like perhaps everywhere) had trouble with tenants paying on time. So, Wu decided that once she bought the property, she would limit her scope to tenants with Section 8 housing vouchers, government subsidies that help low-income families with the rent. That way, Wu said, she would get a direct check from the government every month.

Wu also knew she would be relying on a property manager to help her find tenants, maintain the building and communicate with the bureaucracy behind Section 8. This proved to be a hurdle: the first few property managers she spoke with wouldn’t work in Anacostia. After several frustrating leads, Wu finally found Karissa Leake who had previously worked in the Section 8 office and knew her way around the process.

With her plan in place, last winter, Wu found a four-unit apartment building in Anacostia being sold as-is. Wu made an offer of $328,000 and closed in July. While the property had been renovated with features like granite counters and stainless steel appliances, Wu spent a couple months fixing it up — installing washer/dryers units, sprucing up the lobby and repairing an old duct.

A similar apartment building in Anacostia

Leake was able to find tenants who have been calling Wu’s new investment home since September. Wu’s total monthly income from the property? $5,200. By her calculation, she is earning a 19 percent capitalization rate. “If I had bought a condo for the same price somewhere in Logan Circle, I would maybe be looking at a 6 to 10 percent rate of return,” she determined.

Wu hopes to go to medical school in two years and to use the rental income to pay her tuition. Eventually, she’ll sell, but she’s in no hurry. “I fully expect prices to double in the next ten to fifteen years,” she said.

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• Trulia Says: Move to Anacostia
• Swarming Investors Push Home Prices Up in Anacostia

This article originally published at http://dc.urbanturf.com/articles/blog/the_pursuit_investing_in_anacostia/6415

6 Comments

1. Ben There said at 3:06 pm on Monday December 10, 2012:

   Any allotment in the proforma for unpaid utility bills, lawyers fees when suit is filed for tenants’ unpaid rent (Sec 8 doesn’t cover ALL of it.) and rehab, not just repairs, at turnover? Sometimes there is a REASON no one else is doing it.  The only saving grace may be buying early in a developing area.  Good luck.

1. jag said at 3:14 pm on Monday December 10, 2012:

   Jeez, wish my kitchen looked that nice. Apparently Sec8 is the way to go!

1. mona said at 4:31 pm on Tuesday December 11, 2012:

   I commend her for doing this. Someone has to and glad she did. I hope UrbanTurf follows up with her in about a year to see how things are going.

1. Property investors said at 10:30 am on Friday December 14, 2012:

   I found this informative and interesting blog, so I think so it’s very useful and knowledgeable. I would like to thank you for the efforts you have made in writing this article.

1. Faraji said at 9:12 am on Monday December 17, 2012:

   I’m a little interested in the cap rate math myself. On an unlevered topline basis, assuming zero vacancy, management fee, or expenses, she’s at about 15.8.  In a real world scenario, she’s paying let’s say 8% for management plus a leasing fee of one month’s rent (amortized over a two year tenancy is about $216/mo.), water is another $150, so her fully stabilized net is around 4,418. She’s also going to want to put 10% of gross into property reserves for capital expenditures, but she could lower this based on how much work was done during the rehab. Theoretically, depending on what she put down plus her initial rehab costs, and her loan terms, it’s possible she’s getting somewhere around a 19 on a levered basis. I think small multi-family investing can be a great financial move (I own one myself) but I always caution clients to be realistic about their expense and vacancy projections, especially with older buildings that haven’t had systems upgrades. Those can turn into money pits quickly. And Ben is partially correct. Some Voucher recipients have a contribution, but many don’t, in which case, HCVP pays the entire rent. Good for her for taking this step.

1. Falls Church said at 3:08 pm on Thursday December 27, 2012:

   One issue with Section 8 is that you have little recourse if the tenant damages the unit. While you are permitted to require a security deposit from Section 8 tenants, that won’t be sufficient to cover serious damage.

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