Washington DC: 6.1% Return on Investment (2011)
Washington DC is another metropolitan area that represents a highly difficult environment for investors. With extremely high levels of regulation, high prices, and low rents relative to market value, it is not likely that investment properties in the nation’s capital will produce enough cash to cover their operating expenses. This means that value appreciation is the only way investors can benefit from the Washington DC market. Approximately 45% of property listings in Washington DC are foreclosures[1].
Overall market values in DC stayed relatively stable in 2009, leading many to believe that the market has bottomed and stabilized after the 2008 financial crisis. However, a long-term analysis of market values in Washington DC shows an extremely steep increase in values from the year 2000 through 2005, with values regressing back toward a more linear compounded growth rate. The recent explosion in the size and scope of government helped to stabilize prices in 2009, but values have been eroding in 2010. Our models anticipate a bottom in 2011, with modest value appreciation after the bottom is reached.
Even if investors are successful at buying-in at the bottom of Washington DC’s cyclical adjustment, they will need to finance negative cash flows for a considerable length of time. The situation is complicated by the fact that even when value appreciation occurs, it is not realized until the property is sold. This places many investors in a difficult situation where they must absorb negative cash flows for an extended period of time, and can become very complicated when values become volatile. This complication comes from the necessity of buying at just the right time and then selling at just the right time in order to offset the cumulative negative cash flows and generate a positive net rate of return. Astute investors should set their sights away from the nexus of government to find the best income property opportunities.