Housing market ripe for investment: Here’s what you need to know

I know it sounds strange, but it’s true. Today’s dire economic circumstances have conspired to produce the perfect real estate storm. At least that’s the case if you are in the market to find a bargain.

Huge inventory, low interest rates and highly motivated sellers all combine to make this an ideal time to pick up a house or two — or even three. But before we all rush out and buy the first house we can find, let’s look at the four most important factors of an investor real estate deal:

Location

If you are looking for a rental property that will pay for itself on a monthly basis, you may be best off looking in lower-middle-class neighborhoods where most of the owners occupy their homes and keep their homes in relatively good condition.

Gang graffiti and boarded-up doors and windows are signs to avoid, while accessibility to transportation and relatively recent construction make for good rental income properties. Good public schools are also an important feature for many prospective renters.

Another desirable feature related to location is a neighborhood where most of the homes are similar in size and amenities.

Condition

Try to avoid neighborhoods where most of the homes are less than three bedrooms and two baths or where most of the construction is pre-1950. Homes more than 50 years old will eventually need almost all systems updated, and that is an expense to avoid in a rental situation.

Homes less than 10 years old have almost all systems up to date, and they shouldn’t need major renovations any time soon. In addition, newer homes sometimes offer space for expansion, an inexpensive way to add a bedroom or office.

In an ideal situation, the home should need no work before the renter moves in. At no time in the past 30 years, however, has there been such a large number of homes on the market needing significant repairs.

Many of these homes are bank-owned, and some are uninhabitable. Others may need nothing more than paint and carpet. Being able to distinguish between the two extremes is critical to your success in finding a great deal. At the very least, make all offers contingent upon a full inspection of the property and a satisfactory estimate for all needed repairs.

Price

The glut of bank-owned homes has, in my opinion, kicked the floor out from under the Atlanta residential real estate market. We don’t know what anything is worth because so many of the comparable sales that appraisers use are distressed sales.

But if you can get a price discount in the 40 percent to 50 percent range, it really doesn’t take a great investor to see that there is plenty of room for upside profit, both in the monthly cash flow and in the long-term resale price.

I believe that most lenders had, until recently, hoped for a “resolution trust company-style” bailout from the federal government. But now that the Obama administration has indicated that troubled bank assets will not be purchased directly, pressure to sell is mounting on a daily basis. Seller motivation is growing.

Investors making initial offers on bank-owned homes should be especially careful to stay in touch with the current market of bank resales.

Financing

This is the big wild card for investment property because the current Fannie Mae “four property rule” has kept many veteran investors on the sidelines. But if Fannie Mae were to return to the “10 property” limit, or if banks began offering any kind of reasonable seller financing, the floor under housing prices in Atlanta could be re-established fairly quickly.

All but the most ardent doom and gloomers believe that the current condition of variable home values will end sooner rather than later, and anyone who can lock in a low price now will be glad they did. But the real key is how to finance that low price.

A super-low price combined with a great financing makes for a fabulous real estate investment opportunity. And I believe the solution to this problem is seller financing. I am already starting to get reports of banks selling their houses and agreeing to carry back some sort of financing.

The key for investors is not necessarily a 30-year fixed-rate loan at

6 percent interest with nothing down, although that would be nice. Instead, the key is for banks to be able to convert their nonperforming assets (the vacant houses) into performing assets (loans requiring a substantial down payment and reasonable qualification guidelines).

These loans can be good for the banks and good for the borrower, and they could still be attractive with terms as short as five to seven years. The investment community is ready but needs the financing to act.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.