Where to Invest?
One of the most appealing aspects of investing in real estate is the sheer number of possibilities and amount of flexibility available to those who work in the field, not the least of which is an abundance of locations. So how do you determine the best location is for investment? We’ve talked before about the importance of being able to read local markets, and that should factor into your decision here as well. The more important thing, though, is for you as an investor to understand what your goals, abilities, limitations, and assets are and how each area is workable within those constraints.
Basically, you need to be able to ascertain which area will allow you to make the most of your investment. Areas, or neighborhoods, are often classified according a rating system that designates them as either high-income (A+), mid-range (A-C), or low-income (D).
Remember, lest you get distracted by the terms “low-income” and “high-income,” it’s how the pros and cons of each relate to your overall strategy and position as an investor rather than A+ properties guaranteeing a profit or properties in low-income areas guaranteeing a loss; as we will discuss, that’s simply not how the game works.
While high-income neighborhoods carry the obvious connotations of prestige and wealth, they can also suffer from lower yields and longer marketing times. In other words, they appeal to a smaller slice of the overall population, which makes them take longer to sell, regardless of how well heeled potential buyers may be. They can also be more expensive to maintain and improve, but at the same time, properties in high-income areas can sometimes be easier to sell to affluent and out-of-area investors. Fair warning: renovation in such areas invariably carries a higher price tag.
Mid-range areas are where most market truisms apply to the highest degree; they appeal to the majority of buyers, both homeowners and investors, and thus reflect the housing market much more accurately. The usual considerations of development, growth, and population strain are highly visible in these areas, making them a smart choice for the market-minded investor in that these areas are likely to enjoy value appreciation in good times while taking less of a hit in downturns. While catering to a larger segment of the population can mean greater competition, increased flexibility also means that these areas are of interest to renters, so if you plan to buy and hold while renting, this is your best bet. The same is also true for renovation; the flexibility and competition on the part of contractors means that, in addition to the smaller size of the properties, that renovation is considerably cheaper than high-income areas.
Distressed and low-income neighborhoods often have the most room to go up in value and the widest cash flow spreads, but out of all the area groups, they face the most challenges in maintaining appreciation growth. The good news is that even though you’ll almost definitely require repairs or renovation on your property, the costs are likely to be quite low. It’s a good move for the buy-and-hold investor for renting purposes, or for those who want to play the long game and see area development and value appreciation on the horizon.
By now, you’re probably aware that real estate investment is not a one-size-fits all project. Rather, it’s about finding the right fit for you, and that holds true when deciding on which type of area to invest in. How much are you willing to spend on the project, both in terms of money and time? How is your risk tolerance? Though these are important base concerns, the following are the principal factors you should be considering:
Your Goals:
Your individual goals are the most important consideration here. What are they? How do they apply within the area you’re choosing to invest in? As we discussed, each area, in addition to having its own characteristics that affect the overall market, also comes with its own set of pros and cons, and whether a particular attribute is beneficial to you is purely a matter of what your goals are as an investor.
Your Real Estate Investment Strategy:
Your strategy and overall business model make a huge difference in selecting neighborhoods to invest in. Do you plan to fix and flip homes, rehab and rent them out, opt for turnkey rental programs, or wholesale? Do you have a brand, and how well developed is it? Do you have partners or other investors, and do you have a foothold in the market as a player? Ultimately, the decision should rest on what kind of neighborhood will work best with the assets you already have.
Your Timeline:
Given your goals, what type of timeline are you going to be working on? Is your plan contingent upon rapid appreciation, or are you in it for the long haul? When do you need to access your gains? Is it next week, or 10 years from now? Analyzing your options to ensure maximum results based on how the neighborhood will grow in the future is the best way to determine whether or not to invest in property there.
Price is far less of a factor than the above criteria when choosing where to invest. The resources you have can play into your decision, but creative deal structuring and financing can help even new investors land more expensive house deals.
Any kind of neighborhood will have pros and cons for real estate investors, and that’s important to remember. What works for one investor may not necessarily work for another. Deciding where to invest essentially boils down to finding a neighborhood that best matches your individual strategy, goals, and timeline. There are measurable benefits to diversifying investments across all types of communities if you’re looking for long-term growth, but regardless of where you invest, you will achieve more and have better control your assets and performance with a concentrated approach. Be sure to check us out on Facebook for more tips and information on investing in real estate!
– Get It Right Solutions LLC