Have you ever visited one of the most expensive cities in the country and found yourself in a neighborhood that looks like an apocalyptic wasteland? Maybe you’ve heard stories of sky high real estate prices and homes selling for far over asking with multiple cash offers or streets lined with the homes of technology billionaires or famous celebrities. Most cities in the United States have good and bad parts and this affects real estate in a large way.
Let’s say that you’ve done your market research and found a great market. Income Growth is up, Job Growth is up, Population Growth is up! It looks perfect! Now let’s say you’ve found a killer investment property in that market. The price is right and the listing is beautiful. Before you pull the trigger and buy that great deal, it's important to look deeper.
The old adage in real estate is Location! Location! Location! And that holds true even today, but I would take that a step further and say that real estate is not local, it's hyper-local! The overall town, city, or metro you are looking in may have great indicators, but the real test is the sub-market and neighborhood where this potential deal is located. I always evaluate markets on a macro level when deciding which metros to focus on. When it comes to specific deals I always perform the same evaluation on a micro level in the immediate area where a property is located, usually within 1-2 miles. It’s important to get an idea for the neighborhood makeup because every city will have higher and lower valued areas. I want to make sure that I’m not overpaying for a property and that the vision I have in mind for the property can be achieved.
For example, let’s say I’m evaluating deals in a metro where the average rent is $1,200 per month for a 2 bedroom apartment. Now let’s say I find a 50 unit apartment complex for sale. The unit interiors are decent, but dated and rent for an average of $600 per month. What a great deal! I could buy this complex, renovate the units, and rent them for $1,200 per month, after all that’s the average rent in this metro right? Not so fast. After applying my metrics to the submarket I find that the average rent in this neighborhood is $625 per month for a two bedroom apartment. This isn’t necessarily a bad deal, however I likely wouldn’t be able to renovate the units and rent them for $1,200 per month. It would require a much different plan and different underwriting (and probably a lower purchase price) in order for the deal to be successful. Unfortunately I've spoken with many investors who invested in properties without doing the proper market analysis and found themselves losing money on properties they overpaid for and couldn’t execute their plans on.
Next time you are evaluating a potential property, remember. Real estate isn’t just local, it’s hyper-local!