GETTING STARTED IN REAL ESTATE INVESTING – PHASE 4: LOCATION DUE DILIGENCE
February 23, 2012 By Larry Arth
Getting started in real estate investing investing is all about doing the right things, in the right order BEFORE heading out to buy property. Today we are going to talk about phase 4 which is all about doing your real estate investing location due diligence up front.
Location is to real estate as timing is to the stock market. You see, in the stock market it is imperative to buy at the right time and sell at the right time. Real Estate is the same way. The beauty is, in real estate the markets do not shift by the second, minute, hour or day as they do in the stock market. Real estate investment markets shift much slower than that. To the purposeful investor, he or she can invest with great purpose by identifying which markets that are best positioned at any given point in time.
Now, most real estate agents will tell you it is always a good time to buy and always a good time to sell real estate. This is spoken more from commission breath than a true statement. The statement is true but let’s put it into proper context. There is always a location that represents a great time to buy. As real estate is no different than any other commodity, it also has a better time to sell.
The important aspect is to do the diligence to make sure you are buying in the market that best positions you to ride the wave of appreciation and growth. When you buy low, you can get the best sustainable cash flow, and you can get the best capital growth (appreciation). In essence, location makes up the most important attribute to real state investing.
We have all grown up hearing the expression, “real estate is all about location, location, and location”. Okay, what does this mean? Location is not repeated 3 times because it makes for a memorable catch phrase, it is like a bulls eye.
Speaking in the context of a homebuyer looking for a family home, it may have a different meaning than speaking in the context of a real estate investor. A homebuyer may be looking for waterfront property with a one million dollar budget. An investor’s strategy would not likely pick this to be his or her investment choice as it will not cash follow at all.
So let’s think like the most common home buyer, the one looking to purchase a home in the median price point and let’s ALSO look at it from an investor’s perspective.
Location Due Diligence – Which MSA is the best place to invest?
Note: MSA is described by Wikipedia as “a metropolitan statistical area (MSA) is a geographical region with a relatively high population density at its core and close economic ties throughout the area. A typical metropolitan area is centered on a single large city that wields substantial influence over the region”
So what you want to look for is an MSA that represent long and sustainable growth (see: Getting Started In Real Estate Investing – Best Locations for Turnkey Cash Flow Properties to learn more about these best markets.
Location Due Diligence – Exit Strategy
Thinking with your exit strategy hat on, who will I sell the property to and how will I make money on it? With this frame of reference, you will want to sell to a person or family that represents the largest pool of buyers. This pool of buyers of course is the person looking for a home valued at the median price point of a particular location. So with this in mind, we are now looking for a property in an MSA that represents strong and sustainable growth AND in a location that is within a median price point of homes.
Location Due Diligence – The Value Play
If you want to sell to a homebuyer that will result in the best possible return on your investment when you sell, you want to think like this person.
What will they want from a home? They may want things like schools or jobs and shopping within a reasonable distance. They may want to live in nice locations where other families are. They might want nice yards and a place they feel comfortable raising a family. So put these things on your shopping list.
With your investors hat back on you will want a home that is within the path of progress. To elaborate. if your exit strategy is to sell in say maybe ten years, what will the city look like in ten years? Where is the path of progress, where are they building new retail outlets, to the north to the south, east or west? Where is the town most likely to grow? Positioning your investment to the correct location within the city you purchase will give you a value play.
When you purchase a property on the border of a neighborhood that may be considered a C neighborhood but it is in the direct path of progress, this neighborhood often times becomes a B neighborhood. This increases the value of the property because the path of progress to the city is evolving in that direction. That is where the jobs are going, the shopping centers and schools are going and the values of the properties are rising the fastest.
Yes, I could go on and on here, but I trust you see my point. I often say that you can buy a cash flowing property in any U.S.A. city, however you want to spend some time on this and be purposeful about it! You can indeed buy in any U.S.A. city, so why not get the best location to sustain the returns you are really wanting.
You have to admit this stuff is making good sense! Stay tuned for our next phase, Build your power team!
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