What Can Happen When You Buy The Wrong Property In The Wrong Market?

In order to have a successful real estate investment, you want your investment property located in a place where people (a) want to live and (b) can afford to pay your rent.

Where there is high job growth, there usually is population growth as well. People tend to follow jobs, and people with jobs can pay your rent.

Typically, you’ll want to avoid places that have no job growth or population growth. And you definitely want to avoid places that have no jobs or population at all!

A Cautionary Tale

Some time ago, I received an email from a woman in my Real Estate Investor Goddesses community requesting my help with some property she owns.

Back in the 1980s, she’d been convinced to invest in some land in Belen, New Mexico. This land was about 35 miles outside of Albuquerque. She’d been convinced to buy this land in the desert under the assumption that Albuquerque was going to balloon outward and this land would be soon developed. She never visited the land, but it sounded like a great deal. She paid $5000 per acre and bought 50 acres (a $250,000 investment).

At the time she bought the land, it was completely empty - no houses, no offices, not even any electricity or water hook-ups. It was certainly a speculative investment and, unfortunately, things haven’t gone as she had hoped or had been lead to believe they would...

To make a long story short, over 35 years later that land has never been developed. Well, that’s not that bad, you may be thinking. She can just sell to someone who will develop it or who wants to hold vacant land long-term. That is, in fact, what she’s hoping to do, but at this point, the potential (or lack of potential) for the land is pretty evident. In fact, she’s been told she’ll be lucky to get back $1,000 per acre on this land, though “maybe soon there might be some development…”

I’d been investing in Albuquerque, so she wanted to know if I knew anything or anyone who could help her. I put her in touch with a broker and wished her luck. In this case, however, I’m not feeling particularly optimistic that after three decades of holding that land are going to yield the fruit she had hoped when she made the initial investment, though.

Maybe the land will be developed sometime soon and will be more valuable, but right now it’s only worth 20% of what she paid for it about 40 years ago.

By comparison, if that money had been invested in a CD account at a bank at 5% compound interest, today it would be worth over $1,379,000.

This is a cautionary tale of what can happen when you buy the wrong property in the wrong market, when you don’t get out there and do your due diligence in person, and when you trust someone who doesn’t have all the information that they purport to or who simply cannot be trusted.

So what should you do right now?

1. 
   
2. 1. Search for markets that have several large employers.
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We have all seen and heard the stories of once-bustling cities that had one big employer. When that employer closed the one factory, the people who were employed by the factory lost their jobs, but it also negatively affected all the ancillary businesses that relied on that factory - the parts suppliers, the restaurants, the dry cleaners, and yes, the property owners that housed the workers or leased their commercial space to the businesses.

When the one big employer leaves town, it destroys the whole economy. Seek out markets with lots of employers and new ones coming in.
3. 
   
4. 2. Look for economic diversity. 
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You want multiple employers and a market with multiple industries. Sometimes entire industries can be taken down, and you want to invest in an area with an economy that can withstand this kind of blow.

For example, some coal mining areas in Appalachia may have had several different mining companies operating locally, but that was the only industry. The towns may have survived one coal company shutting down, but when the coal industry as a whole started hurting, it took the whole economy down.

We are seeing now how markets that are reliant on only one main industry (e.g., Las Vegas and Orlando with hospitality) are really suffering with the current economic downturn.
10. 
    
11. 3. Search for areas that have “clearly defined personas.” 
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These are unique areas of a town that have a distinct personality that people want to live in.

“Places that have clearly defined personas are population draws almost as powerful as employment” ~Ken McElroy (ABCs of Real Estate Investment)

Start looking for a market with economic diversity, high job growth and high population growth, and ideally a clearly defined persona TODAY. Don’t try to buy something that “may” have jobs and population growth sometime in the future. If you do that, you are gambling with your money.