The Pursuit: The Reality of Searching for an Investment Property

• August 14, 2012
• 7 Comments

by Shilpi Paul

Charlie Dawson had big plans for his first home purchase.

Dawson, who moved to DC with his wife two years ago, had aspirations that mirror a lot of industrious buyers these days: he was interested in turning a dilapidated row house into a multi-family investment property, with one floor for he and his wife, a rentable basement unit and an addition rental unit on another floor.

The new home.

Dawson, the Financial Services Policy Representative for the National Association of Realtors (NAR), thought he could use an FHA 203(k) loan to finance the renovations and qualify for a larger loan if there was a rental unit involved. Instead of taking out one loan for the mortgage and another for the rehab, the FHA’s 203(k) loan combines both into one. (Here is a quick primer). Though his position with NAR didn’t give him direct insight into the process, Dawson spent evenings researching the loan and talking to lenders.

When his search began, Dawson set his sights in neighborhoods all over the area — Capitol Hill, Petworth, Arlington — for a fixer upper in the $700,000 range. However, as Dawson took a closer look at properties that fit his parameters, a few roadblocks emerged.

First, the competition was fierce. Investors would show up to the properties he visited with cash in hand, hoping to turn a row house into a condo conversion or a new single-family home. Many of the listings would attract multiple offers, resulting in bids that rose well above the initial asking price.

Second, though Dawson liked the mathematics of turning a fixer upper into an investment property, the condition of some of the homes was intimidating.

“We found more than a couple that had actual foundation issues,” Dawson remembers. “When we went in and the floor was angled, it was hard to say ‘we can live here and get this all fixed up’.”

Living Room

So, Dawson and his wife Amy broadened the search to include condos and single-family homes that didn’t meet their initial criteria. Out on the hunt one day, they came across a three-bedroom townhouse just off the H Street Corridor listed for $545,000. It had been renovated in 2004 and had a finished basement, a paved patio…and nice, even hardwood floors. After months spent gingerly walking through crumbling homes, Amy liked the clean, well-maintained home the moment she entered.

“She said ‘we should really get this one,” Dawson remembers.

Patio

The couple submitted an offer, which was accepted and they closed on the house last week. They plan to tweak a few things, like switching out the stove for a gas model and maybe updating the electrical system, but the house is essentially ready when they move in this weekend.

Ultimately, the scale of renovations necessary for the fixer-uppers that Dawson had in mind was just too much. But the dream of turning a run-down house into a money-maker is still alive.

“I think it’s a good idea if you can find the right place for the right price,” Dawson said. “But it’s probably better to do it as an investment, and I think I’d like to do it with a partner.”

This article originally published at http://dc.urbanturf.com/articles/blog/the_pursuit_the_reality_of_searching_for_an_investment_property/5904

7 Comments

1. brandon said at 6:13 pm on Tuesday August 14, 2012:
   So I don’t get it- what are their plans for the house? Doesn’t sound like it’s the ‘rehab into multi-units’ property they set out to find and that they gave up on that plan. Is that right? Did they just buy the house to live in themselves?

1. Kristofferson said at 7:42 pm on Tuesday August 14, 2012:
   Hey Dawson, it takes some brass to buy an investment property and oversee a renovation/rehab project. Hopefully one day you'll find the cohones to get one done!

1. anon said at 7:45 pm on Tuesday August 14, 2012:
   well said kristofferson. there will be no ideal situation for something like that but the numbers have to make sense. in my experience that is what it came down to.

1. Dawson said at 8:10 pm on Tuesday August 14, 2012:
   +1 Kristofferson - perfect and totally agree. Two had foundation issues that I wanted to avoid, and we lost out on two others. This one fit alot of other things I liked so decided to write on this one and got it. For those waiting it out, 203k is a great program to get the numbers to work for a longer term hold on a multifamily property, especially at current interest rates.

1. Paula said at 11:29 pm on Tuesday August 14, 2012:
   I really think not enough people consider areas in SE for an affordable investment property - over the last 20 years some areas in SE (eg. historic anacostia) have had just as much appreciation as many areas in DC in logan circle, CH (www.neighorhoodscout.com), but nobody talks about it. There are TONS of developments going on in SE that are almost non-existent on the internet, so nobody talks about them, unlike the developments in more wealthy areas of town that are being covered extensively by blogs sucha s this one. In certain SE neighborhoods, crime rates are lower than in dupont, chinatown, etc. I wanted to do the same thing as the protagonist in this post, but then ended up bypassing all the competition and earning 3x as much ROI as I would have by buying in NW by buying in SE.

1. David said at 2:18 am on Wednesday August 15, 2012:
   I agree with Paula. Anacostia is the next big thing, and rowhomes are 1/3 of the price of Columbia Heights. A bit edgy now, but that's the price of buying low, and not when everybody's already got wind of the deal.

1. Marie said at 4:30 pm on Wednesday August 15, 2012:
   I think there are several spots in SE that make good investments and some more edgy than others. Historic Anacostia - edgy - has simply charming housing stock, a couple little retail spots and a metro station, which all make, I agree, for medium to long term prospects for appreciation and explain the hot market there. But the more suburban neighborhoods in Penn Branch, Fairfax Village,Hillcrest, etc. are kind of the antithesis of edgy but still have nice prices and are poised to get a boost (and will capitalize on any appreciation in Hill east and historic Anacostia that eventually moves closer to them.)