Do You Know How to Find the Real Estate Investors Sweet Spot
Do you know the meaning behind the phrase real estate is about Location, Location, Location? This may mean different things to different people and it should. A home buyer should have a different perception of this than what a real estate investor should have. To a home buyer it is about fulfilling their objectives of buying a home, like having a home close to their work or school, or places of interest and within the best subdivisions and things of this nature. For example in 2003 my wife and I moved from the cold state of Minnesota to the sunshine state of Florida and our primary objective was "A Warm Location", a quiet suburb and a new community. For us, our 3 aspects of location were all personally motivated toward a new and warmer climate.
A property purchased by an investor however should have an entirely different meaning. It should mean something altogether different. What I have discovered is many investors (especially the newer investors) have not given this any consideration. So then what will Location, Location, Location mean to the real estate investor?
Again depending on the objectives of the investor, this may also break down to different meanings. I believe however that the typical investor is looking for one key component regardless of their investment objective and that is a sustainable real estate investment. (Here again is an interesting observation primarily of new investors.) Sustainability of the investment has not been considered. Location for a sustainable real estate investment will have 3 different components.
Location, Location, and Location, from the eyes of seasoned real estate investor:
The Real Estate sweet spot:
1. Investing within the sweet spot, simply put, is investing within an emerging market and within this market you invest within the path of progress. Now, just like painting a bull’s eye, you narrow it further to the sweet spot within that prescribed area. An area that has a price point which represents a price that the majority of people can afford to purchase. This is typically determined by identifying what is the median home price of the city.
The median home price of a city represents the price point that most people or the average buyer can afford. This larger affordability creates sustainability as more buyers can afford to purchase this home.
2. An area that has the ability to charge rent sufficient to give you decent returns. You typically are looking to capture the 1% rule or better. If you buy homes that are too expensive, you may not cash flow. Expensive homes may still be a bargain compared to value and may be good for the speculative investor, but they offer risk to the sustainable (cash flow) investor. If you buy a home that is too low in price they tend to be older in age and tend to have more unforeseen repairs. The sweet spot will be right in the middle, at or around, the 1% rule.
3. The home itself should be indicative of what the average American (end user) will want to purchase typically a 3 bedroom, 2 bath, and 1 to 2 car garage. This is the home that will attract the largest number of buyers, making for a great exit strategy.
The real estate investor’s bull’s-eye is complete. Emerging Markets > Path of Progress > Sweet spot.
Now that you narrowed the bulls eye you can feel comfortable doing your property due diligence, knowing you have identified a SUSTAINABLE real estate investment.