5 Real Estate Investment Strategies in Philadelphia

Real estate investing in Philadelphia has become increasingly popular and the topic of much discussion over the past 10 or 15 years. On a general level, property investing has been featured on countless television shows on HGTV (and elsewhere) and it seems everyone knows someone these days who flips houses or has a portfolio of rental properties that bring in considerable passive income.

What is real estate investment and how do you get started in Philadelphia? For the purposes of this article, we are defining investing as having some skin in the game. Meaning, some of your money is tied up as equity in the real estate market (i.e. owning a property in some capacity). 

Let’s look at a few real estate investment strategies you might consider to enter into the competitive Philadelphia real estate market and own your own piece of the City of Brotherly Love!

1) Buy a primary residence

While a primary residence is not technically an investment property, you are still investing in real property and have financial exposure to greater market trends. Ultimately, you will pay a mortgage -- it will either be your own mortgage or that of a landlord.  

The important thing to remember is that there are no sure things in life and the same is true with real estate! A primary residence is just that -- a residence. And while one hopes that the market value will appreciate over time, it’s also likely that values could remain flat or even go negative. 

Transaction costs in Philadelphia hover around 7-8 percent on the sell side (meaning you will net $92,000 - 93,000 if you sell the property for $100,000, assuming there is no debt on the property). In short, it costs a lot of money to sell a property so just because a property may have appreciated by 10 percent over the past two years, for example, does not mean that a seller will pull much of a gain out of the deal should they sell. Real estate is generally illiquid so don’t expect rapid appreciation overnight.  

That said, some properties do appreciate very nicely over the period of a few years, so that is always a nice time to consider your options. You could refinance to pull some capital out of the property, assuming you are in a financial position to do so. This could free up more capital to buy another property or do some home improvements or just pay down other, more expensive debt, etc. 

It might also be worth considering selling in order to cash out and buy a larger or more spacious property with the gain. Life events often trigger sales, so who knows what could happen in five or seven years. Regardless, it’s exciting to think about! 

2) Buy a rental property

Another investment strategy is to purchase a condo, single family home, or even a small multi-family property (with two, three or four apartments in it) to generate cash flow. In this scenario, the premise is to acquire the property for a current yield (ie, rental income) with the thesis that rental income will grow and prices will therefore appreciate, all while the tenants pay down the mortgage for you. Not a bad deal if it all works out!

A great potential strategy is to buy a newly constructed property with a tax abatement in place. This allows a purchaser to acquire a home that in theory should require very little in terms of repairs or capital expenditures in the first few years of ownership as properties with tax abatements are recently built. Of course, there is no such thing as a zero-risk opportunity, so make sure you work with a licensed home inspector to make sure there are no issues with the property. Just because it’s new or recently built doesn’t mean it doesn’t have major issues.

That said, brand new homes will usually come with a limited warranty, which should also in theory protect downside risk.

The property will achieve consistent yield once good tenants are sourced and move in. At that point, the tenants will in theory be providing you with cash flow while you simultaneously service the mortgage payments from their rent payment. If you can do this for the duration of your mortgage, say 30 years, you’ll own the property free and clear and should have been able to clip some nice coupons along the way! That said, over the course of 30 years, you probably had to spend a decent amount of money to make repairs and keep the place current and well maintained.

One consideration is management. Who will manage the rental property? Will you do it or will you pay a professional to handle lease-up and management for you. If the latter, expect to pay 6-8 percent of gross income on third party management.

3) Fix-and-flip

Another option is to source a property that needs renovation work or maybe even a full rehabilitation. By buying an old or worn-down property, an investor can create a lot of value by renovating and modernizing something obsolete or even derelict and selling it as a turnkey home for a new buyer. Many buyers lack the wherewithal, liquidity or ability to do a major rehab yet most buyers love newly renovated homes! So they will often pay a premium to buy something that was gutted and fully renovated, particularly if it’s well located.  

Like in any opportunity, there is risk and doing a full rehab is not for the faint of heart. Renovations are time consuming and require a lot of expertise, planning, labor and attention. Are you handy enough to do the work yourself? Do you have the time to do so? Or will you hire a contractor to do the project for you? If so, do you know contractors or would you have to find someone? Do you trust them? Do you know how to make sure your budget is realistic and viable? Did you reserve an additional 10-15 percent of the construction budget just in case something goes wrong? Because many things will go wrong! It’s all part of the process!

There are a lot of ways a rehab project can get off track quickly and devolve into a losing proposition, so make sure to do research and find a renovation team or partner whom you trust and can vet thoroughly through prior clients. 

If done well, the fix and flip option can be very lucrative in Philadelphia so it should definitely be considered. 

4) Renovate and rent for more

The renovate-and-rent strategy is just a mild variation of the fix and flip, but instead of selling after the rehab, you are renting a property out for cash flow, or rental income (yield). This is a great option for an investor who has liquidity and patience and can keep their equity tied up in the deal for a period of time while the market elevates pricing in the ensuing years.

If buying and renovating in an area that is on the verge of a shift in market dynamics, this can be a great opportunity. For, rental growth and appreciation often arrive most dramatically several years after a neighborhood starts to see investment in the form of rehabs or gut renovation projects.  

It’s important to be mindful of the appropriate level of renovation for a particular property. Meaning that it is possible to suppress returns by putting too much money into a rehab. Do you really need to put high end appliances into the kitchen you are renovating? Or will entry level stainless steel appliances that cost a fraction of the high end ones suffice? You’ll need to ask yourself thousands of similar questions to make sure you are in line with the market while also thinking about where things will be in three or five years when you sell (or however long your disposal timeline is, if you even have one).

5) Develop on vacant lot

Like the fix and flip option, building a home on an empty lot can create and unlock tremendous value. But it will also cost the most and be the most challenging of these options. Buying a raw piece of land can be a very good investment if bought at the right time in a real estate cycle and before any ensuing development arrives to drive up prices. But land prices are volatile so this is also quite a risky play. 

If you are able to secure a lot at a good price, developing it can yield wonderful results. That said, you will need to be well capitalized and engage many vendors to assist with the design and construction processes, from environmental reports to architecture to construction to marketing and sales. It can become a full-time job unless you have a partner who can oversee the work and manage the timeline from the outset. Either way it is resource heavy.

Once built, however, you can either sell or rent out. Either way, you’ll likely have created a lot of equity if done right. So get your shovel ready!

Conclusion

These are just a few of the ways that you can get into the real estate market in Philadelphia. As always, work with your experienced real estate professional to help you formulate and stick to a plan. 

Ready to get started? Browse listings and see how much you could save with Prevu’s Smart Buyer commission rebate in Philadelphia.

DISCLAIMER: This material was provided for informational purposes only, and is neither intended to provide, nor should be relied upon as tax, legal, or accounting advice. Prevu and its subsidiaries do not provide tax, legal, or accounting advice. You are encouraged to consult your personal tax, legal, or accounting professionals before considering any transaction as your individual situation may vary.