Investors in small-scale real estate here are beginning to export their profits to other East Coast cities -- some of them hundreds of miles away.
Brokers who specialize in representing buyers of rental houses and small apartment buildings here are combing communities such as Clearwater, Fla., Knoxville, Tenn., Savannah, Ga., Norfolk and Portsmouth, Va., Baltimore, Harrisburg and York, Pa., for properties that come with the low prices and taxes that local investments commonly lack.
The object of their pursuit is what one broker calls "the Holy Grail of residential real estate of the 1980's -- a positive cash flow" on their investments.
D.C. property prices have risen so sharply and so fast -- up an average 56 percent in the last two years alone -- that small rental units can only carry themselves on a cash income-cash outgo basis with an exceptionally large down payment of 40 to 50 percent.
A downtown rowhouse, for example, which could have been purchased for $65,000 2 1/2 years ago and rented out for $500 a month -- a break-even proposition at the time for the new owner -- would cost as much as $95,000 to buy today and would rent out for around $625 a month.
The combination of 13 percent mortgage rates and the substantially higher purchase price produces a monthly cash loss of $200 or more for the investory, depending on the size of the down payment and structuring of the financing terms.
Increases in rents, even in highly desirable areas convenient to downtown employers, have not kept pace with the huge jumps in the costs of acquisition. Many local investors continue to buy rental properties in the city and suburbs for their strong capital appreciation potential, and simply write off much of their cash losses at tax time.
But some of the people who made bundles in Washington area real estate during the early and mid-1970's are now diversifying their holdings, and looking north, south and west for new cities in which to invest.
Inner-city Baltimore unquestionably has received the heaviest attention from Washingtonians -- particularly from buyers of entire blocks or "packages" of brick rowhouses.
Mattison Dale, a Washington consultant representing the owner of 200 Baltimore rental houses north of Fels Point that are now up for sale, says the most active investors in that city today are from the District. He says they are reinvesting gains made from restoring houses on Capitol Hill and other neighborhoods here.
They see the $18,000 to $30,000 price tags on Baltimore rowhouses on streets that border the higher-cost historic districts, he said, and recognize their potential. The rents are low, but the low acquisition prices and owner-financing -- 10 to 20 percent down with 10 1/2 percent long-term interest rates -- create opportunities for break-even or small negative cash flows.
Gaye Thompson of Victorian Real Estate, a District broker who specializes in investment properties, says Baltimore offers bargains to the sharp buyer, but maintains that there are much better, safer ones farther from the metropolitan area.
Thompson, who is currently scouting subdivisions of $40,000 and $50,000 homes in Clearwater, Fla. for District clients, said that Sun Belt growth towns contain some of the best investment options available anywhere: homes with assumable VA and FHA loans at low interest rates.
VA-financed houses with 9 percent or lower loans and relatively small $4,000-to-$8,000 acqusition costs are a fond memory in the Washington area, but readily obtainable in parts of Florida and other southern states. Such houses often can be rented out on a break-even basis or for a positive cash flow, exclusive of local property management charges.
The nation's population is gravitating southward, Thompson noted, particularly retirees, and well-located rental properties in states with low taxes and low energy costs should grow steadily in resale value.
The problem of investing long distance are significant, however, as Thompson concedes. Without a highly reliable brokerage and property management firm on the scene to help rent and take care of houses or a small apartment building, "this whole technique can turn into a real headache" for an investor, she said.
"I would be very cautious in getting involved" she added. Research rental and sales markets in one or more cities -- as well as investigation of local brokers competent to handle out-of-town owners' needs -- should precede any investment decision.
Kenneth R. Harney is executive editor of the Housing and Development Reporter, published by BNA, Inc., and author of Beating Inflation With Real Estate, published by Random House.