When You Have $50K Burning a Hole in Your Pocket …

fire… and you’re looking to invest in the Phoenix real estate market, might I suggest not using it try and purchase a property in cash?

I mention this because I received a pair of calls yesterday. One buyer’s maximum price point was $25,000, the other’s was $50,000.

Consider this. The median sales price in the Phoenix real estate market is just over $180,000. Which means properties meeting even the $50,000 are roughly 72 percent below the median for the market.

Disclaimer: the Fair Housing Act legally prohibits a real estate licensee from discussing specific areas in subjective terms: good, bad, safe, the DMZ.

What I can say is this. Values here have been rising steadily for the past 18 months. Overall, the market has picked up to the tune of 60 percent off the lows of August 2011.

Yet these properties remain priced under $50,000 in an appreciating market.

So if you’re investment goal is appreciation, you’re probably going to be unhappy.

What about cash flow?

On a very, very good day these properties might rent out for $600 a month. More likely, the rent’s going to start with a 5. As a general rule of thumb, the tenants that need properties in the $500s a month barely can afford that; no one chooses to live in a 3-bedroom, 1-bath, 900-square foot, 60-year-old home with only an evaporative cooler and no air conditioning. At least no one with any other options.

On top of whatever money you would end up spending to make up for the likely decades of what we call “deferred maintenance” (and what the rest of the world would say is either “trashing a place” or “not giving a damn”), there is the distinct possibility of discovering tenants who have moved in the middle of the night on the last day of the month.┬áNot that this is unique to lower-priced rentals but the odds certainly are increased.

So when you add in the maintenance expense, possible vacancies and the cleaning/repair/rehab between tenants, the possible profit thins considerably.

What options are left?

One word: leverage.

Take that $50,000 and use part of it as the down payment on a better quality property. Most mortgage programs require 20 percent down on an investment purchase; that $50,000 can be used to purchase a pair of $125,000 properties with better potential appreciation and rent.

One of my clients just purchased a $130,000 home in Buckeye – more than 2,000 square feet, with a long-term tenant paying $850 a month (slightly below market but, given the excellent condition in which the home has been kept, good enough for him.) Other opportunities are appearing constantly right now.

It’s not always the easiest route – it’s sometimes rough trying to get a financed offer through. At the same time, there’s far less competition on homes with tenants in place as that eliminates most buyers looking the owner-occupied route.

And it certainly beats essentially lighting your money on fire in a fire sale.

Of course, if you want a literal fire sale, those come up now and again too as you can see above.

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.