Investors: Know Thy Customers
I live in a fairly rural suburb north of Atlanta, Ga. Just this week, I noticed a new store went into a small vacant space adjacent to a little country gas station about 2 miles from my house. Unfortunately, this space has seen a number of occupants over the last few years and none of them can seem to stay in business. I think much of it has to do with the less than ideal storefront location – directly next to the run down gas station. However, the most recent occupant probably won’t last 2 months … not because of the storefront, but because the owner simply doesn’t understand who her customer is in relationship to where she’s decided to do business. Opening a storefront business that caters to 1% of the population for a particular zip code just doesn’t make a lot of sense.
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Same concept applies to investors. While you may not think of real estate investors as store owners, they are still business owners with customers. Whether you are talking about renters, investors or end buyers, a real estate investor has a target audience in mind when investing in and renovating a piece of real estate.
Be Careful Not To Over-Spend on Your Rehab
I often think of the house flipping shows you see on cable. I remember one of the houses that was featured in Atlanta a few years back that sat on the market for ages without selling. Spending $100K rehabbing a small house in a marginal neighborhood apparently made for good TV ratings, but in reality, it didn’t make any business sense. The neighborhood was very transitional and wasn’t ready for a $300K+ house with every possible upgrade. I am quite sure that the investor either sold the property at a considerable loss or gave it back to the lender. Either way, it was a great lesson in understanding the market and creating a product suitable for that market.
The same can be said about rental properties. You can’t have a rental property in an affluent area and expect to get market rents with worn carpet, scuffed walls, old appliances, etc. You’ve got to know the expectation of the renters in a given area in order to keep your vacancy at a minimum.
While this may seem obvious, it’s amazing how often I see houses that have been over or under-rehabbed. The goal of flipping a property should never be to produce the best looking property …. it should be to maximize profitability by spending the right dollars in the right places. It’s up to every investor to know the market they are in and make appropriate decisions for fixing and upgrading their property to make the most of the investment.
Photo: Universal Pops