“I’ll be right over to take some photos,” my agent said to the woman on the phone, who was calling to list her property for sale while I sat in my agent’s office, “and I’m actually sitting here with one of my biggest clients. Do you mind if I bring him over to look at your property?”
I followed my agent to the woman’s house. I knew the location well, because I owned another house on the street already. I was actively looking for a house to flip, and this neighborhood could work well.
After my agent signed a couple of documents with the woman, the property owner gave us both a tour of the home. “I just need to get out of this town,” she complained. “My family has all recently moved to California, and this house is keeping me here. I just don’t have the money to repair it.”
I made her an offer that day, which she readily accepted: $16,000. Yes, that’s right: $16,000. The house wasn’t in terrible shape, but it did need a good deal of work to get it up to rentable standards. But for many of you reading this book right now, you are thinking, “Just $16,000 for a house? That’s insane.”
Yes, it is. That was the lowest-priced home I have ever purchased. To brag a little more, my 24-unit apartment complex only cost me $565,000. Also crazy, right? I mean, in some areas of the country, you can barely buy the lowest-end home for what I paid for my apartment complex. So is that the secret to my success? I’m just “lucky” enough to live in an area where prices are cheap?
It’s a perfectly valid question. Sure, I am located in a very low-priced area, and I know that there are some areas where prices are astronomically high. Many major metropolitan areas, such as New York, Los Angeles, Denver, Seattle, and Washington, DC, have prices well above the national average. If you live in such an area, this article is for you. I want to share a few thoughts I have concerning high-priced locations and how you can still invest while living in such a place.
Are You Looking for Homes on Sale?
How much do you pay for a gallon of milk? Three dollars? Four dollars? Five dollars? These are all prices I see when I shop for milk, but I never spend more than $2.50. How is it possible that I can get milk for $2.50 a gallon while others are paying up to double that?
It’s because I’m actively looking for a deal. My $2.50 a gallon for milk is not normal; it’s a sale.
In the same way, the property prices I talk about are not normal. No one lists a home for $16,000 like the one I mentioned earlier, even in my area. Often, seasoned investors like me talk about the cheap prices we are getting to make a point (as I’m doing in this very section of this book), but remember that those prices are not retail prices. That home was actually listed at over $30,000 (still a low price, I know), but I knew the seller was motivated, and I could solve her problem quickly.
Are you actively seeking a deal?
When you pull up your list of nearby homes for sale, are you simply looking at the average sale price and trying to compare that with the $16,000 deal I got? If so, you will be very disappointed. The average price for a home in my area is more than ten times as expensive than what I offered. I’ve seen only a few properties that cheap, and most have major problems. The $16,000 deal was a special deal. The apartment complex for half a million dollars was also special. I only buy special deals. They are not once-in-a-lifetime opportunities, but they are also not everyday deals.
I forget now where I heard it (probably the BiggerPockets Forums), but to find a good deal, you should look at 100 homes, offer on 10 and get only one offer accepted. This means that just 1% of the deals that look promising actually are.
What does this mean for your business?
It means you need to look at a lot of properties. You can speed up the time by having very defined standards that you follow, but in the end, you are simply going to need to look at a lot of properties and try to find a great deal!
Next, let’s talk about relativity. And no, we’re not going to talk about Einstein.
Is the Price Relative?
Let’s go back to that analogy about milk. I have a bit of a riddle for you: When would it be the same for my budget to pay $5.00 for milk as it would to pay $2.50?
The answer, of course, is if I made twice as much money. In other words, if I suddenly made double my income but spent double the amount on milk, the percentage of my income I’m spending on milk wouldn’t change.
This is also true in real estate. A home that sells for $100,000 in one area may produce $1,000 per month in rent. However, that same style house in another area may sell for $300,000, but the rent may be $3,000 per month.
It’s all relative! So before you instantly assume you live in an area that is too expensive to invest in, decide first whether the math still works. Many times, it will!
Often, certain investments are working in your town, but they are just not working at your financial level. In other words, the numbers work, but they are so high that the barrier to entry is keeping you out. If so, there are creative methods you can use to get involved. For example, forming a partnership, raising private money, or engaging in real estate wholesaling can allow you to still be involved. There are also a lot of creative ways you can invest in properties that require far less money, which I talk about in my book, The Book on Investing in Real Estate with No (and Low) Money Down.
I understand, of course, that in some areas, a home selling for $300,000 still may only rent for $1,000 per month. I understand that in some areas, the relativity between rent and price is out of whack. Sometimes, properties are just not worth buying.
Related: 3 Reasons I’m Still a Buyer in Today’s Real Estate Market
What Is Working in Your Area?
Perhaps your goal is to buy and hold single-family homes in Manhattan. I’m sorry, but that’s probably not going to work out real well for you. Each location is optimal at certain things, but not at everything. If the math doesn’t seem to work on a certain type of investment in your area, perhaps it’s time to consider what is working.
- Would wholesaling commercial properties be a better use of your time?
- What about multifamily properties?
- How about condo conversions?
- What about fast food triple-net leases?
- Have you considered subsidized low-income housing?
Before blacklisting your entire town, make sure you take time to investigate exactly what your town is good at. Perhaps you’ll discover a highly profitable investing strategy that your “expensive town” is excellent at.
There are dozens of different ways to invest in rental properties; you might just need to find the right niche.
To find what is working in your town, simply connect with investors who are actively engaged in your market. What are they investing in? How are they making a profit? Discover the secret to their success, and you’ll find the path to yours.
Have You Checked the Outskirts?
How much do Starbucks’ employees make in downtown New York City?
My guess is not a whole lot more than they make in my small rural town. My point is this: the large percentage of society who make less than $15 an hour and work in expensive cities still need to live somewhere near their place of work. Baristas are not making six figures, yet they still manage to work in expensive areas. How?
In nearly every expensive city, there are pockets of low-priced properties. Don’t get me wrong, I’m not advocating slumlording or investing in a dangerous ghetto. Those areas have problems and extra expenses of their own. Location is still key in any real estate investment. I’m referring to the middle-class neighborhoods on the outskirts and in the suburbs. Generally, these areas are found 20 to 40 miles outside the city center, in smaller towns and communities. Speak with a good real estate agent about these areas or
get on BiggerPockets and connect with some local successful investors and see where they are investing. Find the best location with the lowest prices, and focus your efforts there.
If still you find that there are no decent locations nearby that you can invest in, perhaps it’s time to look outside your area and consider long-distance investing.
Do you live in a high-priced market? Are you finding creative ways to invest, or are you looking at out-of-state properties?