How to Find the Best Rental Markets

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We love cash flow and growth, don’t we? Rental income, appreciation and escalating house prices make us rich. Then how come we don’t talk enough about the concept of value, which is what makes successful buy and hold investors wealthy?

Since I choose to invest in California, I always consider the long-term as opposed to flipping for a quick profit. Neighborhoods I pick have to be winners. Sometimes I have even paid retail value and suffered negative cash flow for a while just to get into these pride of ownership neighborhoods.

I believed that rents would rise in those areas…they did.  I believed those neighborhoods would appreciate better than average…they have. And during this downturn, I hoped they would hold value better than surrounding houses…by God, they did.

And now, after a short decline, rents in these areas are picking up. I will be raising rents, so I should be making $500 to $800 more a month by this time next year — I really like giving myself a raise!

I would never buy a piece of property that wasn’t a well located house in a high demand neighborhood. I like neighborhoods where people want to be, have to be, need to be. These areas are worth more, re-sell for more and rent for more.

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How do you find these high performing neighborhoods?

One of mentors was Dr David Schumacher, a very successful commercial appraiser who also owned many properties in Hermosa Beach, California. Since the 1960’s, Dr Schumacher bought and held many properties, some right in the boardwalk. Before his death a few years ago, Hermosa Beach dedicated the newly refurbished plaza in front of the Hermosa pier in his honor. Schumacher Plaza was completely renovated as the result of his donation of one million dollars

Dr Schumacher taught me how to find these premium areas by defining the concept of value. Value is nothing more than the anticipation of future benefits. I always ask myself, what are the benefits renters will enjoy five, ten or twenty years from now? A lot of deals are offered to me and seldom do people talk about the growth potential of the area. I always ask them, “What will that property be worth five, ten or twenty years from now?” And I get blank stares back at me most of the time.

Here’s an illustration of the thought process I go through:

One house I bought is in the town of North Fontana located in San Bernardino County, California. At the time, that area of town was set to explode in population because of the brand-new extension of the 210 freeway, which connects Pasadena with the Inland Empire city of San Bernardino. Thanks to the extension, the commute for my Fontana residents who work in Los Angeles has been cut in half.

I am excited for my residents to have quicker access to the entire Los Angeles job market. Twenty years from now the Southern California metropolis will have expanded tremendously, and so will the value of my houses.

Changes in the infrastructure of any area, like newly constructed freeways, bridges, community centers, libraries and schools will increase the livability of the area far into the future.

Neighborhoods that people like to live in are great buy-and-hold areas. When you find out that there are plans to improve a specific area, you will do well to follow the money.

Photo: BlackHawkTraffic

About Author

Steve is the author of three books, is an invited expert commentator for CNN/Money, CBS Radio, Fox TV and numerous other newspapers and media outlets, has been a distinguished speaker at the Harvard Business School, Harvard Law School and their Graduate School of Design, and teaches courses in investing and real estate finance at colleges across Southern California. He is also an active real estate investor and owns 27 investment houses in Southern California and around the country.

5 Comments

  1. I have Dr. Schumacher’s book about his long term holding strategies. It is definitely inspiring book, even though I haven’t agreed on a few things – like when he was saying that it almost doesn’t matter for which price you buy the property, since in 20 or 40 years it will be so much more, that the difference now will be almost nothing.
    I think it is important to make money already when buying – and acquire property for less. It’s safer too.

    Anyway, did you actually know him in person? That is pretty amazing.

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