Thinking of Investing in Residential Real Estate: It's Still Location, Location, Location

Thinking of Investing in Residential Real Estate: It’s Still Location, Location, Location

Remember this: land is the element of real estate that appreciates. Man-made structures begin depreciating from the day they are constructed.

Think schools first.

Schools are often the first consideration for first time home buyers and renters – at least 80% to 90% of the time in my experience. These folks are most likely your biggest target market in your exit strategy for the investment properties you acquire.

Contact the main office of the district(s) serving the neighborhoods you’re interested in. Check the standardized test scores for the district. Obviously, the higher the better as an indicator of how well the district is perceived to be doing. You may be able to find the scores on line too.

Study kindergarten – sixth grade enrollment statistics (also available from the school district). Try to go back as far as ten years. You’re looking for growth in elementary school enrollment. Lots of growth equals desirable neighborhood.

Stay close to home.

Many books and courses advise you to purchase investment property located within a thirty mile radius of your personal residence. I say that’s still too far. Shoot for twenty miles, preferably fifteen.

Here’s what happens with too much distance between you and your investment. It will suffer from your neglect. An extra fifteen miles and minutes is enough to keep you away when an on site visit might really help.

Analyze the neighborhood.

Profitable neighborhoods have a common characteristic; people who can qualify for bank financing (now or in the near future) want to live there.

Ideally you’re looking for entry level to lower mid-range housing, 15 – 50 years old. It’s OK if the area is a little blighted as long as things are on the upturn. Look for visible signs of redevelopment.

Get acquainted with a competent real estate agent that does a lot of business in the neighborhood you’re investigating. Have him or her search the local Multiple Listing Service database and pull up “active listings, pending sales, and sold comps” for the area. If you plan to flip you want an active market – one, it makes it easier to estimate a final retail value for the properties you’re considering buying and two it shows that there are active buyers in the market now. Even if you plan to rent you still want to own in a location that is in demand.

Here are some things your real estate agent can help you sniff out.

• Look for closed sales transactions. There should be a healthy number. A lot of active listings and few closed sales is not a good omen for you.
• At least 70% – 80% of the closed sales should be to owner occupants – not investors buying rental units.
• The majority of buyers are purchasing with conventional bank financing, not various forms of owner financing and other creative methods.

At any rate, stay away from “war zones” with large tracts of run down, vacant houses, high crime rates, etc. These areas can be tempting because people do live there (generally renting) and the ratio of rental income to property values provides the landlord with a much nicer “spread” than is achievable in nicer areas. Some investors literally make a fortune in these neighborhoods. However, it’s probably the toughest segment of the business to operate in. And, alas, 90% of us cannot pull it off.

And now a few last thoughts about the layout and placement of the lot. If any of the following are present, I suggest you pass and move on to the next candidate. These kinds of functional negatives are either impossible or just too hard to overcome and in anything less than a red hot market they will significantly lengthen or kill your exit strategies for the property.

• The lot sits on a hill of any kind.
• The driveway or yard slopes toward the house.
• The lot is located in a flood plain, a valley or sits lower than the properties around it.
• The lot is close to a large stream or drainage ditch.
• The lot is on or backs to a busy or noisy high traffic, street.
• The lot adjoins commercial property or is in a commercial area where traffic, noise, lights, etc. might interfere with quiet enjoyment of a residential property.
• Any land that you know has formerly housed a manufacturer, dry cleaner, gas station or landfill.

Good hunting and choose your location carefully – a bad one can make your investing life miserable.

About The Author

Jim Howard is happy to share his love of real estate with you at realestateshelf.com. Jim’s experience with real estate spans 24 years, during which he achieved the Certified Property Manager designation through the Institute of Real Estate Management while throwing in an MBA along the way. His range of real estate experience includes managing and leasing industrial, retail and office properties as well as managing is own portfolio of residential investment properties. Jim is a licensed real estate broker in the state of Missouri.  http://www.realestateshelf.com