What if you could buy a house for $25,000 in a neighborhood that wasn't a battle-scarred slum and rent it out for $750 a month as soon as the ink was dry on the deal? Where are these deals that let you recapture your investment in just three years and from then on enjoy a steady monthly income from the property?
If you said Phoenix, Las Vegas or south Florida, you'd be wrong says Paul Habibi, a principal of Habibi Properties and real estate professor at UCLA Anderson School of Management.
Here's a hint to the place Habibi thinks is the hottest investment around.
Yep, Habibi is humming "Kansas City" right along with Wilbert Harrison, Fats Domino and the 50 or so other recording artists who covered that tune. As for a real estate investment, Habibi says Kansas City, Mo., is ripe for the picking.
Habibi's approach to real estate deals is not for novice investors, but it is for those who can tolerate some risk and buy into a statistician's mind. He's developed a matrix that filters the top 30 MSAs (metropolitan statistical areas) through their projected growth rates (increasing population is good), unemployment (the lower, the better), and whether the city has a diversified job platform (Silicon Valley won't get his money).
He also rejects places where other investors have already scooped up the bargains (forget Florida and Las Vegas). Phoenix, popular with many investors, also fails his litmus test. It was built as a retirement community and lacks a job infrastructure for future growth, he says. And those Texas cities that everyone bandies about -- Dallas, Austin, San Antonio -- while their prices have remained flat and they seem to have escaped relatively unscathed from the recession, there are so many investors already there that they're tripping over one another.
Kansas City is just about perfect, said Habibi, whose company recently concluded its first phase of buying 32 single-family homes there in "C-level" neighborhoods for a price point of $25,000 each, spent $5,000 to $10,000 on repairs and now rents them out for about $750 each. He expects to double or triple his holdings in Kansas City with his second investment fund, for which there is a minimum buy-in of $100,000 for accredited investors to participate.
Kansas City's population grew at a faster-than-national average pace from 2000 to 2010. With an unemployment rate of 8.7 percent, it falls below the national level of unemployment of 9.1 percent. The city has a diversified industry base that includes Sprint Nextel Corporation, Hallmark Cards, the Fort Leavenworth military base, UPS and a Ford assembly plant. Google has selected the city for its ultra high-speed broadband network project. Plus Kansas City has a business-friendly reputation for encouraging retention of companies.
Habibi discourages individual investors without much experience or tolerance for risk to try to fly solo. He credits much of his success from having an infrastructure in place -- people to scout and inspect the homes, screen for tenants, manage the properties on-site and swiftly deal with eviction issues.
> Pct. homes underwater: 6.58%
> 12-Month home price change: +6.97%
> Unemployment: 5.5%
> Homes built since 2000: 11%
The value of homes in the Hawaii region has gone up nearly 7% in the past 12 months, which is one of the biggest price increases in the country, according to enterprise risk management firm VeroFORECAST. Honolulu owes its strong housing market to a low unemployment rate — just 5.5% — as well as a general high demand for homes. Properties on the island have a much higher value than the U.S. average. According to the Census Bureau’s housing statistics, 58.3% of Honolulu’s homes are worth $500,000 or more, compared to the national average of just 10.5%.
> Pct. homes underwater: 5.93%
> 12-Month home price change: +4.39%
> Unemployment: 7.8%
> Homes built since 2000: 6.7%
About 94% of all homes in the Pittsburgh region are more valuable than their mortgages. Homeowners in the region are fiscally sound. The 7.8% unemployment rate is significantly lower than the national average of 9.1%. In addition, the costs associated with owning a home – mortgages, insurance payments, and taxes – are lower than the national average. According to the Pittsburgh Tribune-Review, many are choosing to buy homes in the region because housing is affordable and foreclosures are relatively low. Last year, Forbes named Pittsburgh as the best place to buy a Home. This year, the city was rated second.
> Pct. homes underwater: 5.71%
> 12-Month home price change: +0.83%
> Unemployment: 5%
> Homes built since 2000: 15.8%
Oklahoma City was rated by Forbes as the fourth best city to buy a home, citing the region’s good conditions for employment. Among the 372 Metropolitan Statistical Areas in the U.S., Oklahoma City has the 11th lowest unemployment rate, at just 5%. According to NewsOK, despite the relatively good condition of the local housing market, regional officials are still thankful for the changes to the Affordable Refinance Program.
> Pct. homes underwater: 5.44%
> 12-Month home price change: -1.83%
> Unemployment: 7.3% (tied for 93rd lowest)
> Homes built since 2000: 10.6%
Lancaster, located in Pennsylvania’s Dutch country, has one of the healthiest housing markets in the country, with just 5.44% of homes with underwater mortgages. The region has low unemployment, and 95.5% of homes are occupied, compared to a national rate of 86.9%. This year, Forbes rated Lancaster as the 7th best place to buy a home, citing low unemployment and affordable housing.
> Pct. homes underwater: 5.30%
> 12-Month home price change: -4.39%
> Unemployment: 8.1%
> Homes built since 2000: 21.7%
Only 9.1% of home sales in Hunstville, Alabama are made by owners who can no longer afford to make mortgage payments. Part of the reason for this is the relatively small expenses owners have to incur to keep the home, such as mortgage and insurance payments. In 53% of the region’s homes, these costs for homeowners are less than 20% of their annual income. In the U.S. as a whole, only 33% of homes are in that favorable position.
> Pct. homes underwater: 4.56%
> 12-Month home price change: +1.14%
> Unemployment: 6.6%
> Homes built since 2000: 21.6%
The expenses that come with owning a home include mortgage and insurance payments, real estate taxes, and heating costs. Nationwide, nearly 30% of homeowners pay more than 2,000 or more on such expenses. In Fayetteville, North Carolina, just 10% pay that much. Unemployment in the region is relatively high, at 10.4%, but low costs and rising home values in the region help keep more than 95% of the region’s mortgages above water.
> Pct. homes underwater: 4.22%
> 12-Month home price change: 3.92%
> Unemployment: 7.3%
> Homes built since 2000: 5.3%
Buffalo home values have been declining for years as businesses have slowly left the region. However, the housing market is beginning to pick up in the region. As reported in USA Today, the Buffalo housing market remained sluggish during the housing bubble, and so it didn’t suffer from the collapse most of the country experienced. In the article, Bonnie Clement, a local realtor, explains: “We’ve never had a market that has gone way over the top, and, therefore, we don’t have a market that’s now falling down.” In the past 12 month period, home values have increased by nearly 4%.
> Pct. homes underwater: 4.01%
> 12-Month home price change: -0.90%
> Unemployment: 6.7%
> Homes built since 2000: 9.6%
Just 4.01% of mortgaged homes in the Albany region are worth less than their mortgages. Like Buffalo, the region didn’t experience much of a housing boom with the rest of the nation, and so the market hasn’t suffered as much in the aftermath. Only 9.6% of currently standing homes were built in the past ten years, compared to a national average of 14.9%. Unemployment in the region is just 6.7%, and just 2.58% of home sales were made because owners could no longer afford upkeep.
> Pct. homes underwater: 3.89%
> 12-Month home price change: +5.73%
> Unemployment: 10.6%
> Homes built since 2000: 19.6%
In the past 12 months, home prices in El Paso have increased by 5.73%, while prices nationwide have dropped by 4.4%. The housing market in the region, according to the El Paso Times, is exceedingly tight. Just 8.2% of homes are vacant, compared to a national rate of 13.1%. According to the article, El Paso is seeing “Historically low home mortgage rates, including a drop below 4 percent for the first time ever early this month…” This has helped increase home value in the area.
> Pct. homes underwater: 3.41%
> 12-Month home price change: +0.25%
> Unemployment: 7.1%
> Homes built since 2000: 7.2%
Just 3.41% of mortgages in the Rochester, NY region are underwater mortgages. This is the lowest rate in the country. The story for Rochester is very much the same as its regional neighbors Albany and Buffalo. The housing boom failed to reach the area, and so very few new homes were built. In the U.S., 8.8% of all homes were built between 2000 and 2005. In Rochester, just 4.1% of current homes were built during that period. Foreclosure rates have been extremely low in the region. In the past recorded 12-month period, just 2.89% of home sales were of formerly foreclosed-upon homes.