Class A Property: What Is It and Why Invest? – Video
Kathy Fettke: Let’s go back to investing in an A area and why you would consider it. Since this is the most desirable areas, everybody wants to live there. People who can afford it, of course want to live there and do. There’s kind of more of a chance of appreciation due to demand, due to the desirability of the area, and due to the fact that the people living here probably can afford those prices to go up. A lot of investors will buy in these neighborhoods because they hope for appreciation. That’s the only reason because you’re not cash flowing. If you’re cash flowing at all, it’s going to be in the 2% or 3%, but in many cases, it’s negative.
Cash flow, that’s something we’re going to do in a different module to really help you understand cash flow. I’ll just quickly summarize it to say, sure, you could buy this property here for $300,000 in Texas or a million dollars in California somewhere. If you paid cash, well, you rent the place out. You’re going to have some cash flow every month.
What’s the actual return based on the money you put in? That’s called cash on cash. The cash you put in and the cash you’re getting out. Well, if you put a million dollars in this property and you’re getting a couple of thousand every month, not very good returns. Again, we’re going to talk cash on cash and all that in a different module. Just know, you’re not going to get high cash flow in A neighborhoods.
The trade-off is you’re probably going to have lower maintenance, generally speaking, because the houses are probably well maintained. You’re probably in an area where it’s mostly owner occupied. Things breaking down and so forth, the chances are it’s not going to happen, but when that maintenance happens, it’s probably going to be expensive. I like to compare A neighborhoods with nice cars, fancy cars. You’re getting a well-made car. It’s probably not going to break down much on you, but when it does, it’s pricey.
A house like this might have a really good HVAC system in it, but it’s one that has to keep this entire, you know what, 4,000sqft home or whatever this is warm. That’s going to be more expensive than a 1,200sqft home and fixing all that. Strategy for this type of neighborhood. If you really want to make some money in an A neighborhood, you want to buy the worst house. You want to buy the beater in a good neighborhood. Fix it up to the standards of that neighborhood and you could really make a huge profit.
The key there is to walk good neighborhoods, find the dump on it and see if you could find out who the owner is. Get it off their hands for as cheap as you can. Have some money or a loan or something to fix that property up to this kind of standard. I’ll tell you that’s a wonderful way to make money. I don’t care what market you’re in. If you’re in an up market or a down market, A neighbors are always going to be desirable.
Strategy number two, to buy and hold for appreciation, only if cash flow is not needed. Let’s take Malibu for example. You’ve got or any town in California that’s the waterfront, or a beach town, or San Francisco, or just any of these high-priced markets. We’ve got people coming in from all over the world. Many investors from China come in and need a place to put their money.
Buying a nice property like this, for cash, and sometimes they don’t even rent them out because they’re not interested in the cash flow. It’s just not what they’re after. They want to have a place to put their money that’s solid, that’s kind of out of the banks. A lot of very wealthy people do not trust cash and banks. For good reasons given what’s happened in Cyprus, oh my goodness. Where now banks, now governments are saying they’re just going to take the money in the bank. This is unprecedented at least for our generation for that to happen. There’s more and more fear out there for people who have money.
Real estate is just a wonderful place to put it, at least for now. If the government decides to take our homes, well then, we’ve really got other more serious problems than money. This is where again, a lot of Chinese are stashing their money. A lot of wealthy people all over the world like buying these A properties, don’t need the cash flow and are holding them for appreciation, but also just to hide it and park it.
You see this Larry Ellison, the founder and CEO of Oracle. I think I got that right. He’s doing that all over Malibu. Just buying up big properties and putting his money there. It’s a strategy that’s really working for him too because those properties are appreciating by the millions.