New Orleans Real Estate: Investing in Recovery

New Orleans and its real estate market were all but decimated when Hurricane Katrina struck the Gulf Coast in 2005, but two and a half years later the …

New Orleans and its real estate market were all but decimated when Hurricane Katrina struck the Gulf Coast in 2005, but two and a half years later the city’s recovery attempts could spell opportunity for investors looking to buy and hold. Gulf Opportunity (GO) Zone investment incentives are still in place until the end of this year in most areas—they’ve been extended until 2010 in some parishes—and increasing numbers of job opportunities mean that the demand for affordable housing is on the rise. If investors carefully research the local market and parishes, they could stand to profit from New Orleans’s recovery process.

New Orleans is attracting younger residents as it is rebuilt| alt=|The downtown skyline viewed from the French Quarter|]Orleans parish was home to 484,674 people in 2000, a number which more than halved after Katrina hit. The estimated population as of 2006 was 223,338, according to U.S. Census data. As people slowly return to the city, the demographics are shifting.

“Most of the elderly aren’t coming back, and that’s a lot of the flooded or gutted houses that are still standing,” Larry Haines, president of Road Home Builders and president of the New Orleans Real Estate Investors Association (NOREIA), said. “As people come back, [we’re] seeing a lot of young professionals that have kind of a mix of social awareness and environmental action-oriented interests….There’s a lot of things playing into the trends, but I’d say within five years you’re going to see a much more vibrant, younger economy.”

One likely influence of this trend towards younger residents could be the high number of job openings in the New Orleans area. “There are jobs everywhere. That ranges from upper and middle management positions to down in the shipyards and that sort of thing. [Employers] are paying $20 to $30 an hour,” Haines said. Terrebonne parish has an unemployment rate below 2 percent, he said.

The University of New Orleans anticipates a job growth rate of 8.4 percent through 2009, according to The Associated Press. Haines believes that, as the job market elsewhere in the country declines, the number of people—particularly young professionals—moving to the New Orleans area in search of work will rise. If this is the case, then the demand for housing is likely to increase.

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With owner-occupied homes making up only 50.7 percent of occupied housing units as of 2006—compared with the national average of 67.3 percent—New Orleans is a renter’s city. “[New Orleans is] bringing in jobs and [doesn’t] have enough housing. If you want to add rental properties or you want to build, it’s the perfect climate for somebody to make some money,” Haines said. Housing is limited in New Orleans because many properties were damaged or destroyed by Katrina.

But investors looking to buy and flip should be extremely cautious. With prices already depressed because of the high number of distressed homes on the market, the effects of the credit crunch and housing depression have lowered New Orleans’s real estate values even more. The appreciation rate was at 1.01 percent as of the fourth quarter of 2007, down from 11.9 percent at the same time the previous year, according to the Office of Federal Housing Enterprise Oversight (OFHEO). The median housing price is $235,000, according to Zillow.com.

Multi-family homes offer the best opportunities because they can be rented for profit or may be sold to landlords who don’t want to bother with rehabilitating properties themselves, Haines said. Single family homes are struggling because there are so many of them on the market. Investors purchasing single family homes could potentially make money by putting the home into service as a Section 8 rental, Haines said, but otherwise it is wise to steer clear.

Downtown, Midtown and Uptown New Orleans are experiencing successful comebacks| alt=|The New Orleans skyline and waterfront at night|]Because of the distressed nature of the New Orleans area, investors need to be sure to do their homework on the specific parishes and neighborhoods before deciding where to buy. Haines’s first real estate investment in New Orleans was a 3,166 square foot single family home that cost him $500,000. The home is in the Lakeview neighborhood, which at the time was believed to be in for a comeback. Not only did the project end up $90,000 over budget, but the area turned out to have been largely populated by elderly residents who chose not to return. The neighborhood hasn’t come back as anticipated, and he now lives in the house because it couldn’t be sold.

“The issue with investors is, without doing the proper due diligence, people rushed in without knowing what the market was really doing,” Haines said. “Now there’s a bunch of investors that are actually losing their houses because they took hard money loans or they used up all their capital and can’t sustain the house because it’s not selling….When you buy the house and you’re expecting to fix it and flip it or rent it, it’s about a four month process so you ought to think about where the market’s going to be in six months.”

Downtown, Midtown and Uptown are all successfully coming back. In particular, Broadmoor—located in the Uptown/Carollton area—is doing well, and Ninth Ward has had a lot of building permits, according to Haines. Other areas, such as Seventh Ward, continue to struggle.

There are also opportunities for investors to get involved in humanitarian efforts in the New Orleans area while making a profit. NOREIA is in the process of setting up a program to provide low-cost rentals through organizations such as the AIDS Coalition and Unity. NOREIA will rehabilitate or rebuild donated properties, using the process to educate investors and train new builders and developers.

“Then when we go to sell [the property] we’re going to sell it at a discount to [investors]. But, if they want to get a significant discount on the house, they’d have to agree to keep it in this rental program…for, say, three years,” Haines said. “Our vision to go forward for NOREIA is 1,200 people doing two deals a year. And that will make a $360 million impact…that our group will bring to the New Orleans area.”

Investors interested in learning more about investing in New Orleans real estate or getting involved with this program can contact NOREIA via the organization’s website.

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