Personally, I don't care about the location of the home I am buying as long it is in a geographically accessible so I know the market and can oversee any development of the property. I buy in lower, middle and upper-end neighborhoods.
Choosing My Personal Target Market
What matters most to me is making sure I can make a profit. The less desirable the location, the less money I will offer. If the home is across the street from a drug house or out in the rural country expect me to want to get a great deal on the home or I will walk away from the deal. It can be difficult to sell a house in a bad area. That is why you want to make sure to buy it right so that you can sell it for a profit. The last thing you want is to be stuck with the house. Some houses sell quicker than others. Price is very important when buying a house; however, sometimes I still walk away from deals when they are not in my target market. Often even the best price isn't worth the headache of buying in the wrong neighborhood. What is the use of buying a home for a good price if you can't sell it or rent it. You still have to pay for insurance, property taxes, and maintenance.
What if you can't sell it for years? Can you handle the holding cost? For these reasons I am well-educated before I buy a house. I know what I like to buy and what I don't want to buy. Since I have been in business, my target market of choice has been buying homes that are centrally located. Most people refer to this area as the “lower-income neighborhoods or the outskirts of the suburbs nearest the city”. Don't worry these areas are not as bad as it is portrayed on television (and you can make a lot of money in the “hood” too). Why have I selected this area as my target market? The main reason why is because I can make a ton of money buying the homes there CHEAP! More importantly, I like to rebuild these areas whenever I can. What better way is there to rebuild than by buying, rehabbing, and restoring the image of these run down neighborhoods? Whatever target market or side of town you decide to invest in, you need to take the time to research the area to get a feel for what is going on in that area of town. Is it a re-sell market or a rental market? Buying a house in a rental market where I planned to re-sell was one of the first mistakes that I made when I got started. Here's the biggest mistake I made… NOT STUDYING THE MARKET! Early on in my real estate career I bought another property in south St. Petersburg, Florida. Everybody else but me knew most of the properties in the area were rental properties. Few if any homes were being bought. This area was not a sellers market, it was a renters market. Not studying the market or doing any research of any kind, I blindly bought the piece of property in south St. Petersburg. When I bought the property, my intentions were to rehab and quickly re-sell it. Because I did not study the market or do research of any kind to find out information about the area where I was buying the property, I was stuck trying to sell that house for nearly eighteen months. So much for a quick re-sell. There are areas in every city that are better markets for rental properties than they are markets to rehab and re-sell properties. Be aware that you are in the right market for whatever it is you are planning to do.
How To Avoid This Costly Investing Mistake
You can avoid this costly mistake by doing your due diligence-study and research the market in the area where you plan to purchase a property. Meet with realtors who do business in the area. Visit with the residents living there. Find out if properties are being sold in the area. If houses are selling in the area, find out how much they are selling for. Ensure you gather all the information you need to make an intelligent decision based on whatever your objectives for the property may be. If you want to rehab and re-sell a property, make sure you study the market for that area to ensure that it's a good area for you to rehab and re-sell in. If you want to rehab and rent, make sure you study the market for that area to ensure that it's a good area for you to do that. Whatever your objective, study the market and ensure that the area where you are purchasing a property will allow you to achieve your objective.
Target Market Selection Tips For Beginner Real Estate Investors
If you are just getting started in real estate investing I advise you to do the following:
1) Plan to buy, rehab, and quickly re-sell properties. The profits you will make early on will provide you with the operating income necessary to continue to buy and re-sell properties.
2) Eventually, when you become financially able, buy and keep some properties as you continue to buy and re-sell others. You can choose to live in, rent, and/or lease with options, etc. the select properties you choose to keep rather than re-sell. Keeping select properties that will appreciate in value long term will prove to be a great investment as well as provide steady cash flow. It's obvious that this was a beginner's mistake I made. Whatever you do make sure you know what your objective is going to be before moving forward on a deal. Is your plan to build a rental portfolio or to re- sell? Whenever I buy houses, either to rehab or assign contracts to other investors that re-sell homes (wholesaling), I only buy in middle class communities. These are the neighborhoods where there are a lot of blue-collar workers who buy basic three bedroom/two bathroom bread and butter homes. Penetrating this market to buy and rehab or wholesale/assign contracts to other investors works well for me. However, I have a lot of clients who also buy homes to rent. I take these clients straight to my stomping ground in the “lower-income neighborhoods”. The main reason for this is because it is easier to have a positive cash flow buying a cheap house in this area and renting it out to cover the mortgage, property insurance, property taxes, and maintenance than it is buying in one of those re-sell areas where properties are much more expensive. I always suggest to my new students never to invest more than 30 miles from your home. When you become a more seasoned investor investing out of the city limits or outside the state may be an option you consider. However, until you begin to gain some buying, rehabbing, and management experience I would not suggest you buy homes that are further than a 30 minute drive from you home. I have seen countless people buy investment properties far away from their residence and lose money. This has happened to me even though I had someone who was going to look out for my interests. This is normally a result of not being able to manage the rehab or rental property (or depending on someone else who decides to screw you). Over the years, I have bought hundreds of houses from investors who were out-of-town owners. After months and sometimes years of tenants driving them insane (repairs, not paying rent, nagging, and countless other problems) they were so fed up that they just wanted to give away the house to get away from the tenants and all the headaches. I love buying these type of home because they are easy to negotiate. I hope you don't become one of this type of sellers.
3 Basic Real Estate Target Markets
When trying to determine your target market, there are only three options that you have. The first is buying homes in lower income neighborhoods. The second is buying homes in middle class neighborhoods (referred to as “bread & butter” homes). The last option is buying in upper-end neighborhoods. With these options now it will depend on what your investment objective is and how much risk you are willing to take. Here are the advantages and disadvantages of buying in each different real estate target market.
Lower-Income Neighborhoods (The Hood)
Advantages of Buying in Lower-Income Neighborhoods:
- Houses are cheap
- There is a high foreclosure rate
- People need to rent homes in the hood
- There are a lot of abandoned homes in the hood
- People are moving back into the hood.
- Better cash flow
Disadvantages of Buying in Lower-Income Neighborhoods:
- High turn over rate
- Job instability
- High crime activity
- Possible Damage to property (from tenants)
- Harder to rent and resell
- Less property appreciation
Advantages of Buying in Middle-Income Neighborhoods:
- Better job stability
- Less crime
- Better quality of tenants
- Better property appreciation
- Easier to sell
Disadvantages of Buying in Middle-Income Neighborhoods:
- Less cash flow
- Harder to rent (because people in this market buy homes)
- Higher property taxes
- Higher insurance
- Cost more to rehab
Advantages of Buying in Higher-End Neighborhoods:
- You can make a bigger profit
- Better appreciation (will depend on area and state)
- Less competition when buying
Disadvantages of Buying in Higher-End Neighborhoods:
- May have to pay Home Owner Association fees
- May take longer to sell
- Higher property taxes
- Higher property insurance
- Can not cash flow if hard to rent the house
5 Property Buying Criteria For New Investors
Before you decide on buying properties in any target market make sure that you follow the steps below.
1) Determine What Your Objective Is Are you going to buy or rent? If you are going to rent you may need to buy in lower/middle income neighborhoods and stay away from upper-end homes. If you are going to sell you need to stay away from lower-income homes (houses in the hood don't sell well) and stick with middle/upper end homes. Know your objectives before you get tarted.
2) Research Your Target Market. Make sure to research the market before you invest. You need to know if it is a renters market or a market where people buy homes. Then only buy homes that allow you to accomplish your objectives.
3) Select a Target Market to Concentrate On After you determine your objective and have a target market, concentrate on that market until you gain enough experience to move onto another target market.
4) Work that Market You should concentrate on that market and learn everything necessary to be the best at buying properties and turning profits in that target market.
5) Make Money & Reinvest Profits When you begin to make money, repeat the process over and over again. If it works once it will probably work again. So there you have it. You now have what it takes to identify the target market of your choice. With this now, it is time to go out into your identified target market to find properties (lower, middle, or upper-end homes) that have the potential to make you a huge profit as a real estate investor.