Is My Town to Small To Invest In? How Will I Know?

[Jared Garfield]

One of the first deals I did in college was a house I bought for $10,000 using a car loan against a Pontiac TransAm with a really cool T-top that I bought at auction.  It was a tip I learned from a Carleton Sheets course that I paid $199 for (with LOL VHS tapes).  The house appraised for $60,000, so it was a no-brainer, right?  So many times new investors love to jump onto a "deal" because it is so cheap!  There really is a lot more to success than buying low and selling high!

The town had about 4,900 people and was in the middle of nowhere 50 minutes from anywhere (It's since lost 10% of those people).  It was really hard to find reliable contractors, there weren't many full time professional agents and property management was impossible.   Very few people had credit for this price range of house, it was too old, too small and there really wasn't a lot of a market.  Remember the number one rule of real estate is:  Location, Location, Location!  How small of a town is too small, and how do I decide where to draw the line?

Since this first learning experience as a team we've done over 3,000 homes in 5 states, and learned from mistakes and successes.  I hope these tips help you avoid the mistakes I made on my first deal:

• What makes you think it's an ideal candidate for a flip? It may be outstanding, but give us some numbers? Is it at least 40% below market value? What do comps say the after repair value will be? How much money will have to be put into renovation to net what kind of profits? After real estate commissions, holding costs, and closing costs, what will you net? What will the ROI be on that flip?
• Get access from a realtor to MLS data regarding absorption rates. How many months supply are there, what is the average days on market that it takes to sell? What percentage of asking price are they getting and how will your after repair condition compare to theirs? How much in concessions/closing costs are sellers paying? How many housing units are selling per month, and what would your competition look like? What is the average age and square footage of the homes that are selling, and how do those compare to yours?
• What is the availability of credit in the area, is the home at or below the median home cost or no more than 20% above median. You want to appeal to the largest cross section of demand.
• what is driving the economy, is it a one horse town? Who are the main employers, are they diverse or tied to one industry? What is the population growth of the area, the unemployment rate? What does the one year and ten year population growth trend look like?
• If it's a small town that is a bedroom community for a much bigger town within 30 minutes that might not be too bad, but if it's isolated be careful. Are there new roads being developed that will grow the area? What does household formation look like? How many new building permits are there per month? Are new schools being built? How are schools in the area?
• How many foreclosures are there in the area, will people decide to buy one of them and fix it up themselves instead of paying you a nice profit? Are there a lot of do-it yourselfers?
• Are there at least two or three good property managers that are succeeding in renting homes? What is the demand for rental housing, and what will the house rent for if you can't sell it immediately? Will you cash flow at a good return if you can't flip it?
• Lastly, who is your target for this flip? What are the demographics of this town age and income wise? Is this most likely to be sold to a baby boomer, a millennial? Older generations might want main level living and small yards, values are different among different generations, so you need to know what the market demands.
• You need to know the finish work required to sell and be nicer and better than your competition. The last thing you want to do is do an underwhelming job on the renovation so that people don't quite get it. Will this small town have affordable and quality construction crews? The wrong crew can really mess up a great flip!
• Prepare to sell at 10% below market unless it's a hot sellers market. Selling quickly to make a little less profit might be worthwhile. If you decide to flip, make sure you have a good lender to get potential buyers pre-qualified, make sure you have a top selling realtor who really knows how to market and gives you accurate expert information.

If I can ever be of assistance, please don't hesitate to reach out! Happy Investing!

[Jared Garfield]

Jon, in fairness, when you can get 3/2 homes that are 1,200 -1,500 sq feet for $35,000 (in C+ neighborhoods) it's a lot easier to do volume.  I'm sure in Washington the deals are a lot more expensive!  We don't kill it on each deal, rather just try for volume.  Hitting a 20+% Cash on Cash Return is the goal.  I started one deal at a time, then two to three, then 8-10 per year.  Finally after the crash we were providing up to 25 per month to major hedge funds.  From there things snowballed.  Having the right team makes all of the difference.  What are you doing in Kent?  Feel free to connect if I can help!  I'm trying to share a new post two or three times per week, maybe you'll benefit from them?