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.
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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.
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.