What are the Best Neighborhoods to Invest in?
A common question I hear is “What are the best neighborhoods to invest in?” The answer is, any neighborhood. There are good deals in any area, and the quality of the deal is more important than where it is located.
Often “hot” neighborhoods have ready buyers but there is much more competition for the deals. It can be very tough to find deals in a hot market because so many other investors are working the area. Prices get driven up. Higher costs mean lower profits.
Conversely there can be competition for buyers. When the market was booming, some neighborhoods became hot with investors, but without much thought of demand for finished product. Washington Village (or Pigtown) in Baltimore was a great example. There were so many investors that when the rehabs were completed there weren’t enough buyers. It is often a trade off, do you want it easier to find a deal or easier to sell it.
The Three Most Important Word In Real Estate
Location Location Location
You’ve heard it before “The three most important words in real estate are Location Location Location.” My Dad used to tell me that. My dad was a smart man but on this, he was wrong! The three most important words in Real Estate Investing are Cash Flow and Equity. A bad deal, in a great area, is still a bad deal. However if you could buy a property for no money down that had $10,000 a year in positive cash flow, would you really care where it was?
Let’s say you pay top dollar for a property in a great neighborhood (property 1) . The high price paid means you have no equity and negative cash flow. Are you really better off than buying in a lesser neighborhood at 50 cents on the dollar (property 2)? Property 2 would have positive cash flow and built in equity. Even if the better location appreciates faster it could be many many years before that investment pays off. In fact by leveraging the equity in the second property and doing things like 1031 exchanges, the better neighborhood property may never catch up to the returns you get on property 2.
It’s sad that many investors I know never learned that important lesson even after years of investing. If you are a collector, pick pretty buildings in nice neighborhoods. If you are an investor, whether in a great neighborhood or not, focus on your return on investment. That would be Cash Flow and Equity.