Don't Rely on Luck: A Lesson in Real Estate Investment

Often times on BP, we get people who ask questions like…

Where should I invest?
What type of property should I buy?
Is this property a good deal?
Should I specialize in wholesaling, fix and flips, new, spec, multi family, SFR, or…?

“All Real Estate is Local”

There is a saying, “all real estate is local.” What, exactly does that saying mean? No matter where you are investing, you will be investing in a local market. Every local market is situated in a larger region, which is comprised of many counties, and each of those counties have smaller sub markets within them.

Example: If I say I live in southern California, what specific area do you imagine I live in? Would it be Los Angeles, Orange County, San Diego, the Inland Empire, or another area completely?

For the record, I live in Orange County. Within Orange County there are coastal areas where real estate values can be in the tens of millions of dollars, and further inland properties where homes sell in the low hundreds of thousands of dollars. One has little to do with the other when it comes to property values.

However; the entire county is affected by the year round perfect weather, overall low unemployment rate, low crime, strong business growth, broad based economy, opportunities for education, medical care, cultural offerings, recreation, and high quality of life. All of those things help add value to the property all over the county. An area where people are employed at a high rate means there are more qualified renters and buyers for real estate. Good news for property owners and investors.

The opposite of that are areas of the state where there is extremely high unemployment, high crime, high drug use, no economic base, etc.

The Point is…

No matter where you are considering purchasing real estate, it’s important to dig deeper into the local area and educate yourself on why values are what they are.

What type of properties have the highest demand?
What percentage of the population are renters vs. owners?
What is the local economy?
What can you buy with your investment dollars?
What amenities and type of finishes does that include, etc.?

Many times I read posts of new investors thinking that because they can buy a home for an extremely low price, it equates to a better deal. It may be. However; a cheap house in a depressed area, with high crime, may end up costing far more in lost appreciation, repairs due to vandalism, and costs associated with high turnover of tenants.

Prices are usually high for a reason. The reason is usually because there’s high demand for properties, due to the quality of life issues I listed above. In areas of high demand, there aren’t going to be the hot deals you can find in other areas. At the same time, the market is usually more stable. Though there are not the low priced properties, there may be opportunities for new construction, whether it’s in SFR, Multi Family, Mixed Use developments, etc. New developments mean lower maintenance and management costs. Renters and buyers also like the energy efficiency, modern designs, etc. Though there may be fewer opportunities for cash flowing properties, there is a high probability for future appreciation.

The Big Picture

No matter what your real estate questions are, the first thing you need to do is look at the bigger picture, then delve into all the questions that are pertinent to the local market. Get to KNOW the local market, and why prices are what they are, why certain niches are doing good or not, etc. How do you get to KNOW your local market?

Watch listings that come onto the market (note age, price, square footage, amenities, size of lot, etc.)
Keep track of sales
Go to Open Houses

In other words, DON’T RELY ON LUCK, do your homework!

Thoughts…?

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.