4/22/12: The Hidden Beauty of Blue Chip Real Estate Investing

There’s nothing more alluring to a couple of real estate guys than a low cut price and nice perky rents.  But is there more to consider when picking a property for a long term relationship?  Our guest for this episode thinks so.

On location in sunny Orlando Florida for this edition of The Real Estate Guys™ radio show:

  • Your perky host, Robert Helms
  • Your low cut co-host, Russell Gray
  • Our blue chip guest, Ryan Hinricher

This is a fun time to be a residential income property real estate investor – especially single family homes.  Prices are low.  Rents are strong.  Interest rates are ridiculous.  Competition for great properties, while starting to pick up, is still very low.  Investors are in the game, but homeowners are mostly running scared.  Perfect!

But (and it’s a big one), as Ryan explains, just because properties are cheap doesn’t mean they’re easy.

Now Ryan is a big brain.  He got a fancy education and went to work in the banking industry as an analyst.  That means he knows how to crunch numbers to recognize trends, cut through the hype and see what an area or an investment is really doing.

After seeing lots of folks caught up in the pre-recession hot market hype, we think it’s important to look below the surface.  Back then, investors bought anything they could simply expecting prices to continue to rise.  Easy equity!  Today, investors are obsessing about cash flow.  There’s nothing wrong with that, but Ryan says there’s a bigger picture.  Just like every property in a hot appreciation market didn’t stand up to well to a shift in the market, is it possible that every pro forma pretty isn’t as sweet as it first appears?

Drawing upon his Wall Street background, Ryan favors a “blue chip” approach.  Why?  Because, he says, in addition to a great rent to price ratio (high rents, low price), there are other very important, but sometimes hidden considerations like turnover, maintenance and long term residual value that all affect your real world bottom line.

Wow.  What does all that mean?

Well, turnover is obvious and the bane of any of income property investor.  Turning a tenant costs money, so longer tenancies are more profitable.

As for maintenance, again it’s pretty obvious.  If your tenant takes good care of your property, it costs you less to repair and maintain it.  Duh.

Then the $64,000 (or more) question is:  how can I get tenants who will stay longer and take better care of my property?  (Remember: if you want to get great answers, you have to ask great questions).

Ryan says better properties attract better tenants.  Brilliant!  But (oh no, not again)  higher class properties typically cost more than the floozy properties, which means at first glance, a blue chip property may not be as sexy as her low class little sister.  However, if you’re going for a long term relationship and not a one month stand, then a longer term tenant who takes care of the property may end up being much more satisfying.

So what is “long term residual value”?

Ryan says a blue chip single family property offers investors something that other types of real estate, including lower end single family properties, don’t:  a variety of attractive exit strategies.

What? After all this talk about long term relationship and now we’re talking about breaking up?  Hey, we didn’t say you were marrying the property.

So, if after a long enjoyable affair with your blue chip property, you decide you’re ready to move on, Ryan posits that a better property will appeal to home buyers. (Remember them?  It’s a currently endangered species of people who actually want to own the home they live and can qualify for a loan to purchase it.)

Just ask anyone who’s tried to sell a property.  The more prospective buyers you have, the better.  So having something that homebuyers as well as investors are interested in, means more options (and a better price) when you and your blue chip property are ready to go your separate ways, whether it’s via a conventional sale, a lease option, a wrap or whatever.  The more people lined up to buy your property, the better.  And Ryan says a blue chip property is more desirable to a retail buyer.  Makes sense.

But we’ve blabbed on enough about this episode.  You really want to hear it yourself.  So listen in as Ryan Hinricher reveals the hidden beauty of blue chip real estate investing!

Listen:

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.

 

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