How to Find Investments That Perform Better Than Average
A question I am often asked actually has a pretty long answer so I wanted to display it here in black and white! The question is, “where do I find the best cash flowing property?” or a parallel question, “where do I find the best appreciating property?” Now, I know this process tends to be more work than the average person typically goes through, and based on questions I am asked, I believe it is because they simply do not know how to find this type of property.
Heck, it took me a number of years to figure out!
If you want to buy above average investments, you want to do as seasoned investors do and conduct the following research.
Side Note: By "above average investments" we are referring to a total Return On Investment (ROI) capitalizing on all 5 income streams. Within these 5 income streams you can easily strengthen the income stream that is most important to you. These tend to be centered around cash flow and or appreciation.
Cash flow tends to be most important to newer investors, while a healthy mix of cash flow with stronger appreciation tends to be favored by more seasoned investors. Whichever is your preference, you will find it within the bullseye.
Finding the bullseye
Think of finding the best property, whether it be cash flowing or it be an appreciating property. To be a great investment it must be purchased in a sustainable market, within the path of progress and within the sweet spot of the market. Think of these attributes as the rings of the bullseye. Just like throwing darts... you score better as you center in on the bullseye.
Best markets (the broader picture)
Path of progress (zooming in)
The sweet spot (zooming in tighter)
Best property (your bullseye)
Now that you have identified the sweet spot, within the path of progress, all located within the best market, it is time to ZOOM way in to find your bullseye. To do that you want to classify micro markets as well as classify the property themselves.
Micro market classes (these are commonly considered to be neighborhoods or subdivisions. Smaller pockets within any city where economic variations separate them from other areas.
Class A neighborhood: the best of the best. Often gated communities within high density of owner occupied properties and within the best school districts
Class B neighborhood: very nice areas typically white collar neighborhoods within larger mix of owner occupied properties and within great school districts
Class C neighborhood: nice property within working class neighborhoods and a fairly balanced mix of owner occupied to tenant occupied properties and average schools
Class D neighborhood: typically older neighborhoods with high density of people living in a smaller area, mostly tenant occupied areas
Class A Property: The best houses, newer in age and often larger in size. Typically always have at least 3 bedrooms, 2 baths and a 2 car garage. A place anyone would want to live in. Mostly owner occupied properties.
Class B property: Great homes, average in size and relatively newer in age. Typically will have 3 bedrooms, 2 baths and a 1 or 2 car garage. Mostly owner occupied properties.
Class C property: Nice homes, average in size, usually 30 years of age or older may be 2 or 4 bedroom. Often only 1 bath, but 2 is preferred. Mix of renters and homeowners.
Class D property: Older and smaller homes. Usually 2 bedrooms and 1 bath. Often no garage at all. Typically in high density areas and the largest portion of residents are renters.
The Cash Flow Bullseye
Cash flow buyers prefer to have a property that generates more cash flow than anticipated appreciation. These properties tend to be your cash flow markets and within C class neighborhoods as well as C class properties. This is where best and cash flow is found. If you desire a little more appreciation potential you can find a C class property in a B class neighborhood.
This will increase your ability to capture a little more appreciation with just a little increase in prices. It will also increase your exit strategy potential to sell to an end user who will pay retail price when you go to sell it.
The Equity Growth Bullseye
It is said that 90 percent of millionaires made their wealth within real estate. This wealth is in large part through the equity growth (home value increases).
While having positive cash flow is paramount to any investment, equity growth investors understand they will trade strong cash flow in exchange for buying nicer properties that have a better chance of creating home value increases. As their exit strategy is to sell to the retail buyer who wants to move their family into the homes they will invest in are within equity growth markets.
Within an equity growth market they will target class B properties within class B neighborhoods. When you as an equity growth buyer prefers a little more cash flow you can do so by buying a C class property within this same perimeter.
So if you followed through to read this far, it suggests some of this information was new to you. You now know how seasoned investors buy properties that perform better. They are less interested in what the pro-forma says than they are confirming they have purchased a Sustainable Investment that will give them consistent returns over time which in turn creates a larger net yield over the calendar year as well as the life of the property ownership. Feel free to reach out to us if you seek any further clarity. We do this stuff every day and are real good at it.