3 Cash Flow And Equity Growth Investment Rules To Live By
It is common to want to look in your own backyard to find an investment property. That is where I started and where most people start. Even many investing books state that you shouldinvest in your own backyard.
Is it the best strategy however?
If real estate is all about location, why would investing in your backyard be considered the best location to invest? Unless you are living in a market that has the country's strongest job growth, the strongest population growth, the country's strongest economic fundamentals and is considered an undervalued market then indeed your backyard may not be a logical place to find the best investment opportunity.
What are you investing in?
Perhaps a better way to look at investments is to consider what type of investment you are acquiring. Fix and flips for example may best be suited in your backyard as it is an active investment that requires your day-to-day attention. This type of investing is a common investment strategy and one that can be very lucrative.
While this is considered an investment, to me this is more of a process merging investments with a job. A job where you have control over your own destiny. You risk having a little or no paycheck at the end of the day, but if you are good at your job you can create a nice income.
Buy and hold investments, however, require investing in areas that are investor advantaged markets. When you are diligent and find a great investment property within a market poised and positioned to offer the longest and most sustainable cash flow and potential for appreciation you now truly have a great investment.
Real Estate Investing Rules to live by
1.Invest in affordable markets:
I am not talking about what is considered affordable to you, but instead look at the big picture. You want to invest in markets that have the ability to offer long term cash flow and appreciation. So look at markets where the average person can most easily afford to buy (or rent the average home). This is where real estate values can sustain growth.
A simple rule of thumb is 3 times income. So if a median income is 50K then a median home price of $150k is affordable. Now when you find a market where a 50k income is within a market that has a median home price of let’s say $120k then you are poised for sustainable growth.
2.Invest with the end in mind:
The exit strategy. This is why they always say,” you make your money going in.” When purchasing, you want to consider who your end buyer will be and invest in property that the largest number of people will want to buy. In the U.S. the 3 bedroom, 2 bathroom, 2 car garage home is the most highly sought after property. First time home buyers, empty nesters, second home buyers and pretty much everyone in between all like these properties. The most highly sought after price point of course is the one which represents the area's median home price. These properties are gold, when you buy the best property in the best markets you have sustainability.
3.Invest with a value play:
This is icing on the cake. When you already have a strong investment market and a property such as the most highly sought after 3/2/2, now you can increase that to a higher level of return.
For example: Acquire a property with these criteria that you can quickly and economically buy cheap and increase the value. Buying a 2 bedroom home with large sq.ft. that can easily convert into a 3 bedroom home. I am from the midwest where we had basements that often could be economically finished off to add inexpensive sq.ft. Another great value play is buying in the path of progress. Invest in areas where the city is growing. This is often where values increase the most. C class neighborhoods often escalate into B class neighborhoods as the area improves.
Seasoned investors do not begin looking for investment property by driving around neighborhoods within their communities looking for property for sale. They get online and search for best cities (or markets) which will be investor advantage markets and then look for these 3 items listed above to find great investments.