How To Select The Right Neighborhood For Real Estate Investing

 Real estate investing can be very lucrative. Availability of good deals or the cash to get started may not be the problem.   Not buying houses from the right neighborhoods so that you can easily sell them can be the biggest problem.

In this article, we look at how the neighborhood affects your profit potential as a real estate investor.

Of course, the more deals you do, the better your judgment becomes when analyzing potential neighborhoods.  It may not always be obvious whether the neighborhood is good or bad when you are buying houses.   When the times comes to sell or rent out, this becomes pretty obvious.

 Especially if you buy a house in a war zone, you might not need to guess.

I once bought a house in a war zone.  The previous owner had bought it all cash two and a half years before.  His plan was to put tenants in the house.   Unfortunately the house was vandalized a few days after he bought it. After he fixed it up, it got vandalized again. This time they took the AC unit and copper plumbing.   The neighbors alerted the city when they noticed the house was flooded.

If this person had taken the time to analyze this neighborhood, he could not have taken the losses he took.

 I intended to wholesale the property, so I got it under contract and got it inspected.  Of course, the inspection report was not pretty.  I ended up negotiating $10,000 more because of this report.  I removed the carpet from the whole house and flipped it to a rehabber a week later for a tidy sum.

Here are a few factors that affect the neighborhood you invest in

i)    Business model
 Obviously you will stick to high end areas if you buy luxury homes.  If you rent out properties or you wholesale them, then you will need to stick to middle income neighborhoods.

 There are more houses for sale and potentially more deals than other neighborhoods. This price range is $100,000 to $150,000 in my area.

Avoid war zones whenever possible.  You can check crime rates with the local police department or city.  Of course since most of us invest in a local market, it is easier to pick out a neighborhood that you are familiar with.

ii)    Exit strategy
 In the example above, since my exit strategy was to flip it, I did not have a problem with the neighborhood. I made this clear to the highly motivated seller.  If I did not get a buyer, there was no way I could get stuck with that property.

 Similarly there are some neighborhoods that are very popular with renters.  So the way you fix them up depends on whether it's a rental or if you intend to re-sell it. Properties that you intend to re-sell will cost you more to fix up compared to properties that you intend to rent out.

iii)    Location within neighborhoods
Schools, shopping centers, parks and other recreational centers and other facilities affect the marketability of properties.   A house where kids need a bus to go to school will be harder to sell than one right next to a school.

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