Choose a Great Investment Area
Not Necessarily a Great Area
We are carrying on with our series of the basics of investing in Real Estate this week and in this article, we move on to finding great investment areas to purchase in. Last week we talked about creating a strong team around you to make the process easier, but without knowing where to buy, you can grind to a halt or worse yet, end up buying in areas that are less profitable and/or more problematic .
Determining what district, town or area to invest in can be the biggest challenge for many initial investors and the biggest issue is often emotional rather than logical. The emotion in this case is typically a bias towards perceptions of what that area is like versus what the potential is longer term. A common area this pops up in, is a bias towards many of the rental districts and this can be both a fatal flaw and missed opportunity.
After all, if you are buying a property you intend to rent out and hold long term as an investment, wouldn’t it make the most sense to have it located in an area where there are plenty of renters looking to rent? There is already plenty of demand there and you already have many potential customers just waiting for you to provide a safe reasonable home for them, so why not cater to those customers?
Yet instead, many new investors purchase a property nearby them to start, in predominately owner occupied areas, and wonder why a) they are having a hard time filling their rental and b) their tenants rotate through every year as these types of tenants tend to go buy their own properties more often. Sound familiar?
So step one is determining these rental areas, but it doesn’t end there, as not all areas are equal. Which leads us to step two.
What’s The Upside?
Step two is determining which of these areas have the most upside. Long term you make money on property from three sources, 1) cash flow, 2) paying down the mortgage and 3) hopefully appreciation. By completing your homework on an area before hand , you can discover areas where opportunities for better or increasing cash flow and appreciation exist. This especially holds true, if you are look at the longer term outlook for an area.
Great examples of this would be areas near pending transportation changes or areas which are currently undergoing transportation changes. Areas where perhaps a new interchange is being created, connecting a formerly secluded area with easy access to a main thoroughfare. Or perhaps the extension of a train or subway system to a new district which previously was only served by bus? These features can be extremely attractive to potential tenants and help increase the values of those districts more than other areas as they suddenly become more desirable.
Another example would be districts currently or about to go through change. These would be areas going through gentrification or revitalization, usually due to their locations. These are districts commonly near city centers that although older, have started to become attractive due to their great locations and proximity to services.
It’s quite common place to see headlines in the news and in the papers telling us of these upcoming changes months and even years in advance and this can be the equivalent of insider trading to an observant investor. As these districts go through their various changes, they become more desirable and with that rents increase and appreciation becomes higher than the norm, creating a great environment for you the owner.
These changes and increases seem to often catch many people by surprise, but by doing your diligence they can be quite easy to see in advance. Do you know of any areas that will suddenly have access to a new ring road whee there was nothing before? Areas close to new hospitals being built? Districts soon to receive train services where there as none before? I’m willing to bet you know of these areas, but perhaps overlooked the possibilities or more accurately, the potential.
A couple caveats can accompany this though. There is a vast difference between proposed changes and approved changes and these changes may initially be detrimental. With projects like trains or interchanges, there may be extended periods where the construction causes initial traffic issues and congestion making the areas temporarily less desirable (which also may make them even more affordable at this time!). This is where a longer term vision allows you to see the future growth and potential that’s coming versus the current turmoil.
When you have a longer term vision for properties and districts and start to think in terms of multiple years or decades versus days, weeks and months you will see more opportunity. Simply put, if you are planning on investing in Real Estate it’s a long term buy and hold strategy versus the day trading mentality that will provide you with long term wealth.
Next week I will move into the various types of property and what I feel make the best investment opportunities. SO I will touch on condos, townhouses and single family dwellings. Until then, if you have some feedback or thoughts for me, I would love to hear them. Additionally, I have added Google’s new +1 option to the site, so if you like any of the posts, be sure to click the icon at the beginning or end of each post to help spread the word. You don’t have to be a Google +1 member to click, so don’t hold back, please.