Analyzing a Location

[Tim Donovan]

I have been analyzing a deal a day for a while now (duplex or triplex). After I figure out if the deal will cash flow, or how to make it cash flow, I am not sure what to do after that. I do a search on neighborhood scout, but other than that I'm having some trouble. So many people I know have their own opinion of areas but its mostly generalized and they haven't lived there but heard a good or bad story. I don't want their personal opinions/preferences to effect a good deal I found, but sometimes they make a good point.

What kind of steps should I take to analyze a location?

What things should I look for?

Is there a book that you used to help?

Should I listen to people at all, or just the people who have lived there?

Thank you!

[Randall Alan]

I am in a fairly hot rental market, @Michael Lewis Lee, a lot of the things you list as important fall into the category of “if I’m buying a house I’m going to live in” or flip a house.  When it comes to rentals, most aren’t on my radar screen as a landlord... not because they aren’t important, but because they frequently aren’t important to my renters.  I have a unit literally right beside a railroad track.  Yes, it’s cheap, but I get just as many applications when I list it as I do a nice rental.  The railroad absolutely drives resale value (down).... but I also bought it super cheap for that very reason.  It’s literally one of our best cash flowing properties (a triplex for under $120,000).  I shake my head in disbelief that people live there! 

A friend a long time ago told me about his first job as a used car salesman... his boss said, “there’s a butt for every seat!”  This property definitely demonstrates that... some people will be looking for “Amenities”, or “road access”, etc as you mention, but  I would suggest many more are just needing a place to live and they will take what they can afford.... the rest they will live with. 

Some of the things go without saying... capital repairs are always a buying consideration, elevation I suppose matters if you are close to water, etc.  

At the end of the day it’s personal preference on what to focus on when purchasing.  You don’t have to live in your rental, and as long as your rental is appealing to your target customer, you will do fine.  Some things will drive appreciation more, like new business coming to town, potentially resulting  in lower supply / higher demand, and that is great.  But I’m going to buy on cash-flow and the current market conditions, and not speculatively purchasing on future upward trends.  The best advice I can offer is to be patient and wait for the under market property.  If you buy low and have $50,000 (extra) equity in the property at closing because you found a great deal, you suddenly have lots of options for exit strategy any time you want.  You can absorb any minor market fluctuation when you find a good deal like that.  We have come across a number of those types of properties - often through wholesalers we work with.  When we find them, hardly any of the things mentioned matter... it all comes down to “this thing cash flows like crazy... I really don’t care if Industry is coming or going, or where the railroad track is.  Sure, I hope it’s not right beside it, but when it is cash flowing 24% cash on cash, it just doesn’t matter.  

As a disclaimer... we are usually buying $75k and under properties... which will get you 1,000sf in my area...  If I was buying $300,000 homes to flip in the same market, suddenly many of the things you mention would become far more important to me.  A home buyer cares much more about location, access, etc, because it is much more of a long term decision in their planning.  Renters, in my experience,  are far less picky. 

Randy