Happy Wednesday Everyone! Today I want to talk about the trap of buying the cheapest real estate you can find. This applies to land, apartments, houses, or whatever asset type you’re focusing on.
One of the cardinal rules of investing is to buy low and sell high. This applies to real estate as well as stocks, but just as with stocks, sometimes a low priced asset simply doesn’t have what it takes to become a high priced asset.
There’s a lot of buzz out there right now about migration to lower priced areas of the country and people are flocking in droves from San Francisco and New York to places like Austin, Boise, or Salt Lake City. It’s true you can find cheaper properties in these areas (comparatively) but you can find even cheaper properties in Charleston, West Virgina. In fact, I know someone in Charleston that buys homes in cash for $5-7,000.00 each!
So why not buy in Charleston? Charleston unfortunately has a declining population and while it has a few draws, notably several college campuses and hospitals, this is not enough to overcome the market forces working against it. Net migration loss and a lack of new jobs are market killers that can affect your portfolio in very real ways. It may be tempting to buy that $10,000 house you saw advertised, but be sure you do your research before pulling the trigger.
We all know about the population boom happening in Atlanta. In fact, Atlanta is one of the hottest multifamily markets in the country right now. Everyone wants to buy in Atlanta! And why not? Atlanta has solid population growth and a robust economy. More people are moving there every day and companies are following suit as they search for the best and brightest workers. Just because Atlanta is booming though, doesn’t mean the rest of the state is. Cities like Atlanta, Hinesville, and Macon* have seen population declines in recent years. Sure there is cheap real estate in those areas, but the cheap properties you buy there won’t necessarily perform the way a higher priced property in a more solid market will, especially over the long run.
Now this is not to say that all properties in a solid market will perform well. There are rougher neighborhoods in many big cities that lack the appreciation of more desirable suburbs or downtown areas. Buying in these areas requires a specific approach to generate the ROI you desire. If you’re not properly prepared, investing in these areas can tank your portfolio fast.
Even outside of rougher neighborhoods, there can be property listed that looks like a steal, but isn't. As an example, I once found what I thought was a nice plot of land in the Santa Cruz mountains. It was a small quarter acre plot for just $7,000.00. I thought I had found the deal of a lifetime! I rushed over to look at it and was ready to buy in cash on the spot. Thankfully I didn’t buy sight unseen because when I went to view the parcel I realized it was a quarter acre plot on the side of a hill that was practically a cliff face. There was no way to build on the land, or even set foot on most of it. I looked at another piece of land in Del Valle Texas, an appreciating area in the path of progress just outside of Austin. This plot seemed like a steal also. It was only $375,000 for seventeen acres! After a little digging(through records - not on the physical land...) I realized the entire property was in a flood zone and there was no way to develop any portion of it. These are just a couple examples of cheap land that would not have been a wise purchase.
So what am I supposed to do you ask? I can’t afford to buy into a high priced market you say! To this I would say find a growing secondary or tertiary market near a city. Oftentimes there are commuter cities outside of major metropolises with healthy renter populations. This can be a great way to get started. If you’re looking for something more hands off, I’d recommend investing in a syndication or Joint Venture deal which will allow you to pool your investment dollars with other investors to leverage into a larger property. Whatever you choose, feel free to reach out to us here at IronGall Investments with any questions!
*And before you chide me for saying Macon’s population is in decline, remember that much of the listed population growth in Macon is due to the city merging with Bibb County for the purposes of census taking which has led to a skewed growth chart for the city. Whenever you do market research and identify areas of high growth, make sure you research what is behind the growth to make sure that there wasn’t simply a change in the way data was collected and analyzed.