I often get email’s 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 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.
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 opportunities, (i.e. Strategies), that they find most readily available in Cobb County.
For example, if you are in a suburban area that has lots of new construction, you may find it more profitable to sell retail (for full market value), to owner occupants. You will also find some demand for rental property and perhaps some foreclosures that are suitable for wholesaling, (i.e. selling to another investor at a deep discount). In newer suburban areas, the majority of properties will tend to have very little equity. But today’s market is unique, because even newer areas may have a supply of foreclosures or short sale opportunities. This was not the case prior to 2008 and the market meltdown.
If you are in an older area such as inside a major city where there are thousands of older properties and many fixer uppers, you are much more likely to find wholesale and rental property deals, and opportunities with properties like condos. Discounted condos are common in many large cities, presenting another option that is unique to this market.
So when it comes to choosing a strategy, your choice will be dictated by the fundamentals presented by each property. Is there a lot of equity to work with? Perhaps wholesaling would be the most profitable strategy. Is there very little equity to work with? And it’s a pre-foreclosure too? Then a short sale might be the best way to make the deal work.
On the other hand many investors choose one specific strategy and then try to find properties with fundamentals that fit that strategy. For example if you want to be a real estate wholesaler, you have to go where the wholesale deals are.
This is what most professional wholesalers will do. They don’t limit themselves to a small geographic area. They travel all over their marketplace trying to find all the properties that will work with that strategy. They may limit their territory somewhat, but generally they will cover a wide geographic area to find only the wholesale deals.
Their 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. These are fundamental issues that are required to make the wholesaling strategy work.
Investors who only focus on one type of strategy are using the demographic method. They are not looking in a particular location, they are looking for a particular type of seller with a property that has a specific set of fundamentals. (i.e. lots of equity, probably a fixer upper, and perhaps it’s also a foreclosure)
Demographic prospecting means using more of a mass marketing technique, and targeting high equity properties whose owners are motivated by things like pre-foreclosure, health issues, job transfers, probate, divorce, and the whole range of life related events that can lead a person to become a motivated seller of a property with a lot of equity.
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 opportunities so I had to go where those opportunities were.
Had I wanted to stay close to home I would check out the properties in my immediate area, say within a 5 or 10 mile range, and then determine what type of strategy would work best for the properties I’ve found in my target area.
It takes a bit more time and experience to get used to using a variety of strategies, since each one has it’s own set of fundamentals that are necessary to obtain a profitable outcome. Most investors begin with one particular strategy. The most common, and easily understood strategy is rental property, as even the most basic “mom and pop” investors can understand the requirements for buying and owning rental property pretty quickly.
In my coaching program I focus on teaching the fundamentals of real estate and how they influence the various investing strategies. Fundamentals are those things that you can’t change about the property. They are the circumstances that you have to work with. For example, if a property has a very high loan to value on it, this means that it has very little equity. Your strategy options will be limited by this fact. When a property has a lot of equity, or is owned free and clear, you and the seller have many more strategy options.
Retailing to owner occupants on a “lease with an option to buy” is my personal favorite strategy in suburban neighborhoods that are predominately owner occupied. You can make that deal work at an 80% loan to value, (LTV), instead of the 60% LTV you need for wholesaling at a deep discount for a quick sale.
So, one key to determining what strategy to use in what area is to look at the age and condition of the properties, (i.e. their general fundamentals), and make offers that work with those fundamentals.
In many cities, 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 Wholesaling strategies will fundamentally require more equity in order for that investment strategy 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 it cost you? and, can you sell it or rent it for more than it will cost?
Donna Robinson is a 16 year veteran of the real estate industry and a staff writer for RealtyBizNews.com. She is an active real estate investor who also provides coaching and consulting services. Contact her at firstname.lastname@example.org or call her office at 888-915-9968 to inquire about coaching or consulting, or to request a free PDF copy of her latest book.