Where Will You Buy and Why? How not to Pick a Loser!

Don't Buy In the Wrong Market, Know How to Pick Them!

I once bought a home in a one horse town of 4,900 people while in college, you would think it was a great deal at $10,000 when it appraised for $62,000 right?  WRONG!  it was a nightmare, there were pretty much no property managers in town, almost all of the realtors were part time, it was a one horse town (Granite Capital of the World - If you wanted a grave stone you were in the right place.)  Unfortunately, this first deal could have killed my real estate career if I wasn't really persistent.   Don't send your real estate investment career to the grave yard, by following the following advice.  If there were a crystal ball that could show you what could go wrong by investing in the wrong town, it would show you this: 

• Does Your Strategy FIt The Market:  If you find a great deal that you think has tons of equity, but there are few buyers, days on market are 365, there are few jobs, and the market is losing a lot of population, flipping might not be the wisest strategy.  On the other hand if you are in a hot sellers market with bidding wars, immediate multiple offers, then flipping is ideal, but work feverishly trying to find a buy and hold cash flow deal that will hit 30% cash on cash returns.  You can lowball all day and you will likely never win anything.  Fit the strategy to the market, not the market to the strategy.

• Access MLS Data: Absorption rates tell you how many months of supply are on the market, you also want to know average days on market that it takes to sell? What percentage of asking price are homes selling for, and how will your home's after repair condition compare this competition? How much in concessions/closing costs are sellers paying in this market? 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?

• Know The Target Buyer:  What are the demographics of this town age and income wise? 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 priced homes.  Will the buyer qualify for your price?  You want to appeal to the largest cross section of demand.  Is there a culture of home ownership, do the families in the area prefer to rent?  What are the rent rates versus home ownership rates?  How long do people stay in their homes on average?  What type of amenities do people expect in this price range (You Do Not Want To Over or Under Renovate).  

• What's 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?  Are any companies moving to town and bringing jobs, or shutting down?

• Location, Location, Location:  It's the #1 rule in real estate for a reason.  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?  Are there major hospitals, colleges or anything else that brings stability to a small town?

• What Cycle Is Your Market In:  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?  Is the market saturated with so many foreclosures that it will take a long time for your purchase to appreciate, or is inventory declining such that prices will drive up?  Buy in Absorption markets sell in Expansion just before the market hits Equillibrium before a Decline Cycle turns your equity into Monopoly money.

• Management Makes or Breaks the Deal:  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?  Do you have a good manager that won't nickel and dime you for every repair, and can they fill properties quickly, will they report sufficiently?  Are their fees reasonable?

We have done over 3,000 properties in five states and would love to help provide value to you, whether it's helping you provide professionals to complete your team, or helping you with market research or providing renovated properties or access to the best foreclosures and renovation teams.  If I can ever be of assistance, please don't hesitate to reach out! Happy Investing!