I often get email from investors asking me how they can tell which real estate investing strategy is ideal in their city. From the perspective of a new investor it can often be difficult to decide what particular strategy you should use in a given area. There are two essential ways to break down a real estate market for residential real estate investing. One is geographically and the other is demographically. You are either staying in one particular area, and the game is location, location, location, or you are searching for people who are part of a specific group, such as those facing foreclosure. In the case of Geographics let's say we have an investor who lives in Cobb County, GA and he or she only wants to buy and sell properties in Cobb County. Since this investor has chosen to limit themselves to a specific geographic location, they will be limited to the deals (i.e. Strategies) that they find most readily available in Cobb County. If you are in a suburban area that has lots of new construction, you may find more retailing opportunities to owner occupants. You will also find some rentals and virtually nothing suitable for fast cash sales because everything is too new. And, the majority of properties in new areas have very little equity. If you are in an older area such as inside the city of Atlanta where there are thousands of older properties and many fixer uppers, you are much more likely to find cash sales deals, and some kinds of rental property deals but relatively little new construction. So when it comes to choosing a strategy, your choice will be dictated by the situation. Is there a lot of equity to work with? Perhaps wholesaling is the best choice. Is there very little equity to work with? And it's a pre-foreclosure too? Then a short sale might be the only way to make the deal work. On the other hand many investors prefer to choose a strategy and then try to find a house that fits that strategy. For example if you want to focus on generating fast cash deals, you have to go where the fast cash deals are. This is what most professional wholesalers will do. They don't limit themselves to a small geographic area. They may cover a very large area in order to find all the potential fast cash deals that they reasonably can. They may limit their territory somewhat, but generally they will cover a wide geographic area to find only the wholesale deals. Their demographic focus will be on contacting owners of older properties that are abandoned, or need lots of repairs. This is because these properties generally represent the best opportunity for lots of equity and a flexible seller. If you are in need of a quick cash deal, you don't want to waste your time contacting owners of 2 year-old houses with no equity. Investors who do this are using the demographic method. They are not trying to stay in a small geographic area, they are looking for a seller who is in a particular group, like pre-foreclosure, for example. Demographic prospecting means using more of a mass marketing technique, and targeting pre-foreclosures, health issues, job transfers, probate, divorce, and the whole range of life related events that can lead a person to become a motivated seller. In this case, you try to get the seller to find you. It is much more efficient for your business if you make it possible for this kind of seller to find you. It is more common among professional investors to search for deals demographically rather than limit themselves to specific geographic locations. However this means you must have a willingness to drive sufficient distances to check leads. I personally have driven more than 200 miles in a single day, while viewing as many as 12 properties. At that point I was specifically looking for wholesale-able opportunities so I had to go where those opportunities were. Had I wanted to stay close to home, which is located about 45 miles from the most active fast cash area of fixer uppers, I would only pursue strategies that work with pretty houses, such as lease options, or subject-to, for a buy and hold strategy. My geographic area is newer and therefore it contains very few fast cash sales opportunities, in the immediate area, but is a better area for rentals. It can take you some time to get a feel for the types of deals that are most likely to be found in your area. If you are in an older area mostly built prior to 1970, then chances are very good that you would find more fast cash, wholesale type opportunities. If you live in a new area where most of the construction is less than 10 years old you would find more opportunities that offer less equity. These call for creative strategies. They work best in a buy and hold type situation, and offer less opportunity for fast cash profits. So, one key to determining what strategy to use in what area is to look at the age and condition of the properties in your area and make offers that work for those properties. The other key is decide what kind of strategy you want to go after, fast cash, retail or rental,and find the area that has the kind of opportunities you need. In any part of the country, some areas are ideal for rental, retailing, new construction section 8, fast cash fixer uppers and seller financing. In Atlanta, the outlying suburban areas are much more likely to be ideal for retailing, or buy and hold strategies. The in-town neighborhoods in the older parts of the city are better suited to strategies like wholesaling, because older houses tend to have more equity and need repairs. Newer houses usually have less equity and therefore are better candidates for creative cash flow strategies, like "lease with option to buy", or "subject-to the existing mortgage". Creative cash flow strategies may require less equity where fast cash strategies will require more equity in order for the numbers to work. Any strategy only makes sense if the numbers work. Regardless of where you are located, and whether your market is "hot" or "cold", the bottom line is -- what will cost you? and, Can you sell it or rent it for more than it will cost? With any deal in any market, you always have to assure that you are buying right. No matter what strategy you think is best for your market, you always want to be sure that you are never paying too much, so that you remain as profitable as possible. Bad buying is virtually impossible to fix. This means that you need to remain conservative when running the numbers on any potential deal. That is why I use the classic wholesaling formula as my benchmark for buying in any market. It gives me a starting point for the absolute best possible deal. Then, I can go up (or down) from there with my offer. The wholesaling benchmark serves as a guide to many professional investors, who know that to survive in a commodity investment for the long haul, you have to learn to identify the really good opportunities, and stay away from those that do not present a high probability for profit. Knowing when to walk away is half the battle. |
