Get some real estate investors in a room, provide some adult beverages and good eats, then ask ’em about cash flow, price, and those factors’ relationship to location quality. Wait ’til they’re ready for the second round of beers, then ask ’em whether or not their opinions might change, depending upon whether or not the investment is short or long term. That’s a discussion that gets interesting quickly. The short term folks don’t really care all that much about location. They get in, get out, count their profits, rinse ‘n repeat. As long as nobody messes with ’em in the process, what do they care about location quality? Frankly, with a few obvious exceptions I wouldn’t argue the point much.
Long term and Location
Then I ask the flipper if he’d care to own that ‘beautiful fixed up babe of a property’ for the next 5-10 years. Most of the time it gets quiet. They realize the reason they were able to buy so low was due to the quality — relatively speaking now — of the neighborhood. If it had been in high demand, the price woulda been higher, our first ‘duh’ moment today. ‘Course, my observation has been that most flippers simply don’t get into long term investing. If they’re one of the rare flippers who’ve figured out that side of the business, and it is rare, the money’s so good they simply keep the machine runnin’. But the ones who do see the benefits of having a long term column on their spreadsheets still can’t seem to resist the super low prices of less than blue ribbon neighborhoods.
That’s a huge mistake on several levels. Here’s just a few.
- Buying in neighborhoods in which you’d not put Mom or Grandma to live alone, means your tenants won’t be the quality for which you should strive.
- Whatever the operating expenses you’re expecting? They’ll be more. Your turnover rate will higher. Ditto on eviction rate. The same goes with maintenance and repair, as not so cool tenants tend to treat your property in not so cool ways. Who knew?
- If appreciation ever rears its gorgeous head again — and we should never impute that into any spreadsheet, ever — which neighborhood do ya think is gonna go up more and faster? Our second ‘duh’ moment.
Flippers have such a potentially monster advantage over the typical long term real estate investor. They can use their after tax flipping profits, to the extent possible, to enhance and/or add velocity to the capital growth rate of their long term portfolio. In the long run just that one strategy alone can literally make the difference between retiring with a few rentals, or enough to generate a retirement income easily into five figures monthly.
But to do that safely, the location quality should be stubbornly held to the highest bar possible. Put another way, ask yourself this question:
If I had to retire tomorrow, and I could own a dozen rentals in the crummy to mediocre neighborhoods in which I’m flipping — OR — the same number in areas in which I’d gladly put Mom to live, which income source would I prefer? Which one would allow me to sleep better?
See how your thinking changes when you put it that way? All of a sudden you begin to picture yourself in retirement, forced to rely on the flakes renting homes in the areas in which you flipped for all those years. Yeah, that’s the ticket — not.
I realize I pound the location factor relentlessly. But my lifetime of experience has shown beyond rational debate that ignoring that foundational principle puts long term real estate investors on a one way street to disappointment, stress, and in too many cases, retirements that are more like serving out a sentence, than what was originally intended.
Photo: Joseph Novak