Commercial Land Developer Buying, Renting Houses

The company has been paying an average of $120,000 per home, not including an additional $10,000 per home for carry costs and improvements, and has been able to rent them out within 30 days of closing on the properties. His IRR projection on a five-year hold is in the upper 20% range. His cash-on-cash return on rents is pegged at 7%, with the remainder coming through increased value.

"Our key to success is built-in appreciation," he tells GlobeSt.com. "We found a source for bulk purchases that allows us to get under market; we believe we are buying 20% to 30% below what we see as today's comps."

Two years ago, on some of its 600 acres of land holdings California, Arizona and Nevada, Montecito was in various stages of development for eight shopping centers. Schulman tells GlobeSt.com that four of them never got off the ground and the four that were completed fortunately sold at peak cap rates, though the proceeds were well taxed because a planned tax-free exchange did not materialize.

Montecito also has developed office and apartment projects in the past decade. Prior to that, the company was a major homebuilder in the region. Now it might just be buying some of those homes back.

"We're saying it's the equivalent of apartments but makes more sense right now because we are in the most over-corrected city in our country when it comes to single family homes," Schulman says. "We looked at every opportunity – busted up retail, condos and apartments, everything existing that one might invest in—and the only thing we found undervalued is single family homes. There might be another good distressed deal out there but you'd be buying it at today's market value. We think we are able to buy single family homes under their current market value."

With a record number of foreclosures in the Las Vegas Valley, Montecito expects to add substantially to its first 15 houses in the next 30- to 60 days, Schulman says. Day-to-day management of Montecito's houses is being handled by locally based Metro Marketing and Realty.

"So far we've done phenomenally well; there's so many to pick from we are finding we can get what we want," Schulman says. "We're buying in good areas at great prices so we can look for the best tenant instead of the best rate. I guess the negative is a positive for us."