I recently had an opportunity to purchase a home in a great neighborhood. It had great resale potential, plus great lease opportunity if you wanted to buy and hold it. I could have done a spreadsheet on the house and the numbers would have looked great.
Had I not gone to see it in person in the neighborhood, I might have made the real estate investment purchase based on the spreadsheet numbers and made a critical mistake just because the numbers looked so good.
Going to that particular house, I found it ended up being on the exterior perimeter of this great neighborhood subdivision. Lo and behold, I stepped into the backyard, looked up, and there was the power plant supplying power to that community. The towers rose high. The wires ran left and right.
Why numbers do not always tell the right real estate investing story
It’s a good example where just because the numbers look great and you know it’s a great neighborhood, you’ve got to go to that house. As it turned out, that house was a block over from, and on the exterior perimeter, of that great neighborhood where those great returns were available. Because of what I saw in the neighborhood visit, it made the deal null and void for that particular house and it was no longer a good investment.
If you are an investor looking to buy a home in a particular neighborhood, whether you live in that city or not, your knowledge of that section of a neighborhood should be just as good as the local police department or fire department. They know a city block by block and street by street.
It is important for an investor to have that same degree of intelligence and here’s why:
Why are these 3 investing exit strategies tied to closely to the neighborhood?
First, it comes to boiling down the real estate investor’s 3 potential exit strategies on a house:
No. 1 – Buy it to hold and rent.
No. 2 – Buy it to wholesale to another investor.
No. 3 – Buy it to rehab and resell it, commonly called flipping.
Regardless of which exit strategy you choose or type of real estate investor you are, that neighborhood is the end-all, be-all to the success of your strategy because if you are going to buy and hold it to rent, that house should:
- Be in a neighborhood where you can get decent tenants
- Be in a neighborhood where you can get very low vacancy rents
- Get rents that can cash flow
That is all driven by the neighborhood. Same with the wholesale strategy. That house better be in a neighborhood where your wholesale buyers are interested.
On the rehab or flipping side, that house better be in a neighborhood where it can command a retail sales price when you sell it on the retail market.
A real estate investor can look at the numbers on paper, but that paper may not jive with what is happening in the real world in that neighborhood. Sometimes investors are just looking at the numbers.
I have a bedrock rule of real estate investing
If I do not know a neighborhood as well as a local police officer, firefighter or bus driver, then I either increase my intelligence about that neighborhood or I look for other investment opportunities.
As I describe in this broadcast, knowing a neighborhood requires a lot of experience – it demands the kind of shoe-leather reporting a journalist would perform – to understand the dynamics of a community. Without that research, and based on numbers alone, an investor will not have the necessary context to make the right decision.
In Dallas, where I invest to rent or renovate to sell distressed properties, I have a thorough understanding of the area in which I work. That means I know the similarities and differences within a neighborhood on a street-by-street, house-by-house basis.
And yes, gathering this intelligence involves a lot of work, but the alternative is far worse: Buying a home, which, on paper looks like an ideal investment with the potential for a quick return, but turns into a financial mess.
For example: Two identical properties, from the same developer and listed for the same price, can be in the same neighborhood but not in same school district.
One home may be zoned for a top charter school with a strong track record of academic achievement and college placement, while the other district lacks resources, has overcrowded classrooms, and lesser-qualified teachers and fewer after-school programs.
If a real estate investor does not know that fact – and few things influence the long-term value of a home more than the public schools in a respective neighborhood – he or she should learn that material as soon as possible.
Also, a neighborhood is an organic thing; it has commercial districts, residential areas with multiple personalities (singles in one part of town, couples and families in another), and homes on the proverbial other side of the tracks. And there are statistics that impact every aspect of this community, when reduced to its individual components.
An additional example: Know the safety statistics about a neighborhood; know how responsive and equipped its police department is, how up-to-date the local utility provider is, and if there is an equally staffed EMT squad and fire department.
Again, explore a neighborhood where you intend to do business. Take notes about the integrity of the roads, sidewalks and parks; look for any and all points of attraction – like public libraries, public pools and public athletic fields – that may enhance a neighborhood’s character and increase its appeal to prospective buyers.
And finally, get all the relevant numbers about the pricing history of homes in a neighborhood. Find out if the number of listings, and the prices for those listings, correspond with your own expectations or calculations.
Knowing the context of how those numbers fit alongside the broader aspects of the community you seek to invest in, ask yourself this question: Does the math make sense?
In other words, answer the rationale for your proposed plan of action. The data you gather should, if assembled and reviewed properly, reveal whether a particular home in a particular neighborhood falls into one of three categories:
- Yes, buy the property
- No, do not buy the property
- Maybe, as it may unclear if this property is worth buying
From there, a real estate investor can be an informed professional. He or she can make the right choice, for the right reasons, without a large degree of speculation.
This process may be exhaustive, but it offers the peace of mind real estate investors deserve and the clarity they need to execute a smart transaction.