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Why ‘Don’t Buy In THAT Neighborhood’ is STUPID Advice!

by Lisa Phillips on December 22, 2013 · 26 comments

  
Stop

As a beginning real estate investor, we’ve all looked started looking at properties, and most of us come to a point where we start seeing houses in a very low price range.

We ask people who have invested real estate, “what about these cheap houses in this neighborhood?”, and you’re immediate response can often be “Stay away from that neighborhood!”

That was the response I got, and a good thing I didn’t listen and I considered all options, else I wouldn’t have found the great deals I have today. I want to explore that immediate gut reaction we get from experience real estate investors, and show how that isn’t always the best advice for a new investors, and that a more appropriate response can be given to really guide new investors in a more affordable way of investing in real estate that can end very successfully.

Let’s face it, when we ask for advice on a new idea we have, we are looking for someone with experience to validate our ideas more often then not. When people told me to “stay away from certain neighborhoods,” I was always skeptical. I always thought to myself, “Have you actually gone and checked that neighborhood out?” Sadly, or maybe not so sadly, the answer was always, and unequivocally “No, I haven’t.” And that is the problem for newer investors: You don’t want to make a big mistake investing, as this may be your first big venture, but the homes that you can easily afford to fix, flip, or rent, “experts” are telling you are going to fail at and to stay away sight unseen. That advice may not be appropriate for you, and can cause you to wait and wait for that perfect opportunity in a pricier neighborhood, but those opportunities aren’t just sitting there waiting for new investors to grab – they go very quickly.

Be A Little Skeptical

I am lucky that I usually check out a restaurant, business, or property out myself if I have an idea that I can make it work, regardless of what other people say. It’s nice to look at all the people who told me to not invest in those properties, now congratulate me and to let them know if I see more. The point is, when someone steers you away from perfectly legitimate investments, the onus is on that new investor to be investigate if their advice is based on firm physical evidence, and do the vetting themselves before taking someone else’ word as gospel. Going to an internet forum to have an colleague who lives half way across the country, giving you advice on the neighborhood that’s a 20 minute drive from you, isn’t going to net you an accurate portrayal on whether you should stay away from a certain neighborhood. If someone has an important opinion about this, however, its up to the new investor to ask: Have you invested in this area or this city? Have you been to this neighborhood and driven on this street? Have you had tenants in this area? Those are the most important questions to follow up and ask when someone is very quick to shoot down what can potentially be a great idea and investment strategy.

Location, Location….Location?

As a new investor, when you see the opportunities but the “experts” don’t agree with you, take the time to take that extra step to see for yourself if an investment is a good opportunity. Real estate investing is all about location, location, location. The point of that is: Each location has so many different factors of causes the price to rise or fall, you really need to vet the locations personally. At the end of the day, you can’t take advice from people who do not know the area intimately, as gospel on what your investment strategy should be. That’s why you hear experienced investors say all that time, “Ask the neighbor next door what the neighborhood is like” when looking for potential investment properties. Everyone is different. Some investors have access to a lot of credit, some investors don’t. Some investors have a plethora of new houses that are under foreclosure in their cities, and some areas just have older homes that aren’t new and have a lower premium for those properties. However, as a new investor, it’s going to be up to you to find those sweet, sweet deals for your flip, or buy and hold strategy, and shape your success.

Normalcy Bias, Much?

In business, and in real estate investing, those who stay “safe” don’t always get the best returns. Doing what everyone else does or says won’t necessarily lead you to financial success, and commonly accepted wisdom on money in many, many instances turn out to not hold any water at all. Everyone under the sun for the last 40 years have put trillions of dollars in their retirement accounts, tied up in stocks, bonds, mutual funds, large cap stock, small cap stocks, etc. They are betting their entire financial retirement on this investment vehicle. That’s normal, it’s what every one does, right? However, if you asked the majority of people of details mechanics of what causes a stock to be highly valued versus others, what’s a P/E ratio, and how well the companies they are invested in  have performed in the last 2 quarters based off their estimated projection, they couldn’t really tell you. However, with this much lack of knowledge, they still entrust their retirement well being on a mechanism they don’t understand and trust their money to fund managers that get paid 2.3% of their money if the stock loses or gains. To me, that’s a clear issue of normalcy bias, and when I hear people say only invest in A,B neighborhoods, even if the returns aren’t there, I have to say is part of the same normalcy bias where you make financial decisions that won’t always lead new investors to the gains they were looking for.

At the end of the day, we all have investing experience we can share with others. New investors should keep in mind that there is so much diversity that our experiences do not always apply to their particular locations and endeavors, and they shouldn’t stifle the potential investments sight and unseen. Get in the car, do a little driving, and talk to some neighbors yourself to see if a neighborhood is comfortable. You will get the picture immediately, and it’s even likely you’ll find some gems that are off the beaten path that you may just love investing in. It happened to me.

Photo: Free Grunge Textures – www.freestock.ca

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{ 26 comments… read them below or add one }

Randy Phillips December 22, 2013 at 1:44 pm

I actually target the lower income areas, my buyers luv these houses bcuz their cheap and have a great rent cash flow. Of course what works for me is, I just wholesale them to my cash buyers without touching them.

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Kevin Polite December 22, 2013 at 2:09 pm

Lisa, some of the best advice I’ve seen and this is so true. I’ve invested in areas where the demos were changing and my thought was to renovate for the people who was starting to move there, not for the demos that were there. It’s worked so far. Thanks for a great piece. Take away it is after you’ve done your research trust your own instinct.

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Lisa Phillips December 22, 2013 at 9:21 pm

Yes, I’ve noticed over the last 4 years the demographics are changing as working professionals are trying to make their dollars stretch more, so its changing every single day.

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A.C. Cooley December 22, 2013 at 2:11 pm

Great article. You have to learn neighborhoods for yourself. I had a deal fall in my lap last month but it was actually in a war zone. I wouldn’t dare rehab in that neighborhood but there are some experienced rehabbers who would. If you find a deal in a war zone you can also refer it to another investor who might give you a birddog fee or if you are savvy get it under contract and wholesale it. I did not want this house but I got it under contract for $1,000. At that price I knew SOMEBODY would want it.

I’m saying to target war zones but if something falls in your lap that is a steal you can do something with it even if it is only a $500 referral fee.

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Lisa Phillips December 22, 2013 at 9:23 pm

I’d take it :-) And, you’re right, other investors are more than happy to go in there and get the deal. I know my comfort level is a lot higher than normal, since I’ve been okay so far investing in lower income neighborhoods. Like anything, with experience comes more comfort with the complexities.

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chuck wilson December 22, 2013 at 2:41 pm

Lisa you are absolutely right. I can’t tell you how many times some working stiff has told me “don’t do that, too much risk” . Lucky for me I have always looked at the source of the opinion and usually disregarded it. I am sure with the holidays approaching all of our relatives will be chimming in on what you should or shouldn’t do. Do yourself a favor and say “thanks for sharing” and ignore it!

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Lisa Phillips December 22, 2013 at 9:28 pm

Lol, sounds like we both have the “im not going to listen to this” gene, I have it in abundance! It has really made the difference to me actually starting my businesses. If I had a dime…..

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Sergio December 22, 2013 at 3:59 pm

Thanks again Lisa for another great article

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Lisa Phillips December 23, 2013 at 3:46 pm

Thank you Sergio. Feel free to message me if there are any subjects in particular you would like to see addressed!

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Robert Leonard December 22, 2013 at 6:17 pm

Great article Lisa! What I would like to add is, this idea of keeping an open mind applies to everything! Everything anybody tells you about anything related to real estate is a matter of opinion until you verify it. If you haven’t verified it yourself or from multiple trustworthy sources, it’s just an opinion. The more you get to know the people you interact with, the more you will learn who’s opinions usually prove to be accurate and who’s don’t!

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Lisa Phillips December 22, 2013 at 9:25 pm

That’s right. It just takes guts, and sometimes you just have to stop asking everyone else for advice, and just go out see for yourself. Imagine those first settlers coming from England in the 1600s – they just had courage and some guts, and it really turned out well. Not to get too historic, but they were the first real estate investors! ;-)

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Jeff Brown December 22, 2013 at 6:32 pm

The real question might be, “Is the ‘expert’ a real expert?” I’ve been stupid for over 30 years now.

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Lisa Phillips December 22, 2013 at 9:25 pm

Lol! I think I joined that club a long time ago, too, Jeff!

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Gerald Harris December 22, 2013 at 7:06 pm

I can’t tell you the number of investors that have told me to stay away from certain areas or certain neighborhoods. I am now realizing that old reputations are not current conditions and actually some of the neighborhoods in these areas can make you a quick buck. Great Article!

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Lisa Phillips December 22, 2013 at 9:27 pm

Thanks! Well, Im amazed how this is “common knowledge,” because 9 times of out 10 its simply isnt true. Don’t cut out your profits listening to people who haven’t stepped foot in that location.

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Aaron Yates December 23, 2013 at 7:23 am

Great post Lisa. I have written a couple posts as well in regards to this. This happens all too often and clouds new investors minds.

Im glad you also see the issues at hand with seasoned investors and also the fact that everyone makes money different ways in their investing.

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Lisa Phillips December 23, 2013 at 12:21 pm

Thank you Aaron, thats exactly the point! Diversity of ways to make money, and I just don’t want people to be scared off and stricken with uncertainty once they find out its okay to have doubts, but still go forward and make it work, especially when the ROI can be so much better than others.

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Lisa Phillips December 23, 2013 at 12:21 pm

AND, I will definitely read your articles about this!

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chris December 23, 2013 at 8:13 am

I must go against most of these replies and say this article was more fluff than substance in my mind. If you are going to touch on this topic it would be more helpful to explain how you analyze neighborhoods differently then the “experts”, and what makes them wrong? What investing strategy are you using in these areas? If the whole point of the article is just saying “don’t believe everything you hear” then it sure took you a long time to say it.

Flipping houses in rough neighborhoods is a lot different then buying rentals in the same areas, and you could probably say that about all the different investing strategies in real estate. My two cents is simply this: In Minnesota (just like every state I am sure) we have the cheap houses. They are in the worst areas of the twin cities.We have our war zone of North MPLS, but there are a lot of other neighborhoods where homicides are prevalent. The city provides “a shots fired map” that is basically a heat map of the entire city and very helpful in determining where the violent crimes are.

You run market trends in those neighborhoods right now and they are side-ways or still trending down, and they have been for quite some time. Even in neighborhoods I would rate just above them the trend for appreciation over the next 5 years is terrible.

In other words, appreciation for single family residential rentals is extremely important and tends to get overlooked with newer investors. All they consider is cash flow, but the power of appreciation (location) in my mind is the most important factor to consider. My state is hot right now where some areas are going to perform at 14% year-over-year. Compare that with the lower rated neighborhoods where some will end up negative, or under 3% and tell me who is laughing?

Investing in buy-an-hold in these neighborhoods is probably a terrible idea unless you want a rental upside down in value, but if you know how to accurately run a market trends analysis then you will know if a market is appreciating or not. You can also make some opinions on where a neighborhood is heading.

For flipping? Completely different scenarios then the buy-and-hold. What does not work for one neighborhood could work just fine for another investing strategy.

And that is where this topic’s advice can hold some value. When other investors say a area is “bad to invest in” or whatever it should be specified that “this area is bad to invest in with this type of strategy”. Generalizations are almost never true. Know how to run the numbers and analyze investments yourself and 3rd party opinion becomes just that: an opinion.

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Lisa Phillips December 23, 2013 at 12:18 pm

Hi Chris,
the fact is, for a lot of new investors, this advice is definitely needed. I am in the starting out forums all the time when I see this question asked, and something that seems obvious to you is NOT obvious to the new real estate investor (it wasn’t for me, and it isn’t currently for a lot of other people).

As to the metrics I use for due diligence, patience: I am a weekly contributor. I give out one spot a week, and as provide more and more articles for biggerpockets, all of these due diligence matrix have been and will be layed out. Its not overly complex, but at one article a week that I focus on putting new investors in the right frame of mind of analyzing all their options before shutting the door, it will just take a few weeks.

This advice is clearly not for an experienced investor who is set in their ways, its for newer investors who are still trying to find their way. They can look at my previous articles on this sites and others to see ALL of the advice I can give on the topic.

Bottom Line: What’s obvious to you, isn’t obvious to others. I think that is why there is such a disconnect for new investors on getting the information they really need, because some of the experts think its obvious. Having been on that other side (and it was extremely frustrating), its not “obvious” at all when you get started and don’t know anything about real estate, and some of whats “obvious” flies in the face of positive cashflow and mathematics many times

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Al Williamson December 23, 2013 at 3:17 pm

Chris,
I hear what you’re saying. There are many frameworks to evaluating struggling neighborhoods but I don’t hear too many people talking about them. I spot great opportunities by looking a cluster of improvements and city zoning.

If I see a clump of owners trying to improve a section of a struggling neighborhood, then I check if they are in a designated improvement zone. If that’s the case, then I’ll:

1. Look at the opportunities to buy something in close proximity to the active owners.
2. Check if there’s a communication mechanism that I could use to coordinate with the group (i.e., business or neighborhood association).
3. Check the trend of employment/entrepreneurial opportunities.

This is a good process to help an investor catch an improvement wave and capture appreciation as well as cash flow.

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Lisa Phillips December 23, 2013 at 3:45 pm

And, just one point I wanted to put out there: The cashflow is amazing. All in costs are from 40-50k, with 800-1000 a month in rental income – its not an appreciation play necessarily (although with foreclosures you already have built in equity), but the monthly positive cashflow is great for any investor. Thanks for sharing your opinion though!

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Justin December 24, 2013 at 2:40 pm

Great post Al.
Lisa and Al, do you personally see merits in renting to section 8 tenants? Do you currently rent to them?
Thanks,

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Lisa Phillips December 24, 2013 at 7:58 pm

Hi Justin: I used to rent to section 8, however, over the last 3 years section 8 renters have been renting out homes in higher end neighborhoods in the suburbs, as their subsidies give them that option, and in my neighborhoods its more a shift to hourly wage workers (dental hygeinist, insurance brokers, veterans etc) as the need to lower housing cost but still live in a nicely renovated home. Im not opposed to it, as it has worked out for me in the past, but I have not received those rental applications recently.

James December 24, 2013 at 4:46 pm

Lisa, I read your article and watched your video. It’s always a good reminder to remain open-minded. I tend to play it safe and buy in neighborhoods that have appreciation over time, i.e. buy and hold, but modest cash flow (Chris’s advice). I have been thinking about other areas where the cash flow could be a lot better, but I hear these people telling me, “Oh, you don’t want to buy in that neighborhood”…. projected fear. I sometimes think that I am being told to stay away because these same people giving me that advice don’t want any competition for the great deals out there! In 2014, I’m going to look into investing in neighborhoods where I normally wouldn’t. Thanks for your advice! P.S. Al, I also like your ideas…very smart!

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Lisa Phillips December 24, 2013 at 8:03 pm

Diversify, right? Thanks for the comment, I think you’re spot on in a lot of what you say. However, when people do say “Stay Away From That Neighborhood,” i think it usually stems from a lot of projected fear. I could be wrong, but its incomprehensible to me when people tell me that, and I go there and things are just fine. Ah well, whatever the cause of them to say that sight unseen, it shouldn’t stop new investors from considering the cash flowing strategies, and to listen to their own instincts and judgements after visiting the place.

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