Determining the best neighborhoods to purchase wholesale properties depends on your income strategy. In today’s market, it’s still a good strategy to be looking for REO unless you want the hassles that come with purchasing a short sale. There are exceptions to this but why not take the easy route with REO.
The good news is that you will still find REO properties in many neighborhoods these days. You can buy wholesale in low, moderate, middle, and upper income neighborhoods. The critical point to consider is how you intend to make money from your investment.
When You Want Rentals
What attracts investors to low income neighborhoods are high renter occupancy rates. Typically, more than 80% of the properties in these neighborhoods have absentee owners. The people living here are renters. That makes it a good investment choice if you want to add inexpensive rental property to your investment portfolio. It makes it a bad investment choice if you intend to flip or rehab the property because there are few people looking to buy here. That’s what keeps the prices low.
The one exception here is if the neighborhood already shows a strong trend of revitalization. In that case, rehabbing can be an option but I think the risk out weighs the potential profits. Revitalization is all but dead in today’s markets. If the trend started four years ago, those that got in early are probably underwater now. You should stick strictly with rental income in these neighborhoods.
Rehabbing and Flipping
Moderate income neighborhoods are typically blue-collar residents. The ratio of homeowners to renters is more evenly split. Older residents have often managed to save a down payment and purchased a home, while younger residents may or may not be working but they are still renting. In today’s economic market, this is a good neighborhood for either rental income or modest rehab flipping. But with unemployment still holding the economy back, it’s best to stick with rental income in these neighborhoods.
Middle income neighborhoods, also known as bread and butter neighborhoods, offer the most potential in today’s wholesale market place. During stronger economic times, wholesale opportunities are rare in these neighborhoods. They are typically 80% owner occupied with 20% or less rentals. Occupations of the owners include professionals and skilled tradesman. People that are less likely to be unemployed. However, today’s continuing high unemployment rates and the predatory loans made years ago have significantly increased wholesale opportunities in these neighborhoods.
While the majority of people in middle income neighborhoods remain fully employed, there are exceptions. More of them have become unemployed than at any time in the last several decades. They too have faced foreclosure and the concentration of REO properties in middle income neighborhoods remains high. These neighborhoods were also affected by predatory loans in recent years. People with poor credit scores bought into these loans in order to move up to better neighborhoods. Many have lost homes they could marginally afford in the first place.
The deals you are looking for in middle income neighborhoods are wholesale flips. Look for properties that have been relatively well maintained and require little or no work to bring back on the market. There are plenty of qualified buyers looking to purchase in these neighborhoods but fewer people looking to rent. Your best opportunity is to buy at wholesale and flip the property at the lower end of the retail scale for a quick sale.
Upper income neighborhoods are about finding houses in need of serious rehab. You will find an occasional opportunity to wholesale purchase a REO that is ready for a retail flip. However, rehabs are more plentiful. Opportunities exist in neighborhoods with houses that are 20 to 30 years old. Well-established and have desirable locations. Owners are older and some have lost their house for medical reasons. They couldn’t make the mortgage and let the place fall into disrepair. Buying the property at wholesale and bringing it back up to the neighborhood standard can be a profitable opportunity in these neighborhoods.
It’s not that money can’t be made in today’s economy; it’s about knowing where the opportunities exist.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.