What to Look for in a Neighborhood When Buying Investment Properties

I often get asked the question, “What do I look for in a neighborhood?”

My answer is always the same. “Easy. Value!”

I usually get a strange look, but it’s true. In a neighborhood, I am looking for clues to assess the value of the property, plain and simple.

Well, maybe not so plain and simple, I know. So let me explain.

Normally, value-add properties are not in the expensive areas of town. It’s rare that you’ll find a value-add investor meeting his or her investment goals buying in the expensive parts of town. There are generally fewer homes needing rehabbing and other factors to add value that are there are going for top dollar. It’s safe to say the bulk of the value-add investor activity is taking place in the mid-to-low range of home prices.

That’s not to say I wouldn’t look in to, or buy in, top neighborhoods. Occasionally there are bargains to be scooped up there, but not often enough to focus on.

But, there are some places I definitely WON’T invest in.

I won’t TOUCH the urban war zone. Let me describe what I mean.

“You usually don’t go there because it’s common knowledge that you shouldn’t. If you happen to wander in that area, you are given suspicious looks by all the folks walking the streets and sitting outside their houses. Your car definitely doesn’t belong there! It seems nobody takes any pride in their dwelling, and trash seems to be a normal part of the décor.”

Do you know of places like that? If you are living in a town of any size, you probably know of a neighborhood that fits the above description.

Watch out for those neighborhoods in serious decline. If the area looks like it soon WILL BE an urban war zone, pass on the deal. You don’t need a property that is going to be hard to rent or sell. The holding cost could take your good investment into the red! You can drive through and pick up many clues in this regard.

• Look if there are a high number of “for sale” and “for rent” signs. If a mass exodus is in progress, you DON’T want to be where everyone is trying to get out.
• Check crime statistics with the local police.
• Check recent real estate sales if you can get a peek at the MLS.
• Ask an appraiser about what values have done in that area over the last couple of years. Areas in decline usually stand out in your appraiser’s mind, so an appraiser can be a wealth of information.
• Talk to other investors and wholesalers familiar with the area.
• Talk to your title company contact in that area…they often know trends for a given area very well!

Another tactic is to work it the other way. Find out what’s hot before you start driving and looking!

Talk to your investor friends, wholesalers, agents/brokers, appraisers, and title company contacts about what areas are hot for investors these days. That way, you start learning positive areas and you have the benefit of someone else having gone before you. Of course, do your own checking but finding out where investors are putting their money will give you clues about where you want to invest.

I would recommend against asking family and friends not related to the real estate industry about neighborhoods. This is often the worst assessment of value you’ll ever find. The reactions you’ll get to areas from uninformed family and friends will often be more negative based on hearsay. Get your information from reliable sources and ensure it is based on fact.

True enough, there are LOTS of neighborhoods that are much better than war zones, yet not in the expensive areas of town. That’s where my best investments live.

So, what do I mean by value?

If a property is in an area where you WILL invest, it comes down to the deal itself. For me, the better the deal, the less I worry about the neighborhood. My preference – buy a class C property in a B neighborhood or a B in an A area. As a refresher, here are the basics of property analysis:

• What can I buy it for?
• What will it cash flow?
• What will it be worth all fixed up?
• How extensive is the rehab?

Those are the basic questions that must be answered in an individual property analysis, but that’s an article… perhaps a book… for another day.

In conclusion, first determine whether you will invest in a neighborhood, then evaluate the deal itself. You will probably find that there are some neighborhoods where you won’t invest unless the deal is a home run. By the same token, there will likely be areas that you feel confident enough about that you’ll take an average deal because you like that particular area.

You are the investor, and these are the kind of exciting decisions that investors get to make! Isn’t that what makes this fun!