Deciding to invest in real estate is the first step in a long process to becoming a successful investor. There are many different investment strategies that you must first consider. Among the four most successful ones today are:
- Landlording rentals
- Flipping houses
- Owner financing houses
- Purchase lease options
Your Strategy is Only the Beginning
However, deciding on an investing strategy is only the beginning of your decision-making. Next, comes deciding on a general location or neighborhood to invest in. If you’re going to be an active landlord or manage contractors remodeling a house to flip, you’re probably going to want your investment property to be within a 20-minute drive from where you live or work. If you’re going to use a property management company or general contractor this becomes less of an issue.
One thing to consider from the beginning is if you’re going to use a real estate agent or go at it by yourself. There’s good logic to at least begin your search on your own to avoid the inevitable pressure to make a hasty purchase decision that all sales people naturally bring to the table.
Once you determine what neighborhoods are within your investing range and you’ve decided on your strategy, it’s time to learn which neighborhoods best meet your other criteria. A good way of beginning this research is looking up U.S. Census data using zip codes. You can find average income, average ages, number of children per household, etc. This information along with an established investing strategy will help you determine which neighborhoods you’re most likely to be successful in.
For instance, if you are going to rent, middle-income neighborhoods with younger adults and young children should be a primary target for you. If you’re going to flip houses, you want slightly older adults with slightly older children. First time buyers. Although, many flippers have done well going after a higher income level where more established adults are moving up to a better house with more amenities.
Different Strategies Fit Different Neighborhoods
On the other hand, if you’re going to be into owner financing you want to get into a lower income neighborhood. You’re looking for people that can’t qualify for a traditional mortgage. Something else to consider with this investing strategy are the average rents for the neighborhood. Of course, average rents should also be a consideration if you going to be a landlord. But you’re looking for two different things depending if you going to be a landlord or an owner financer. As a landlord, you need the average rent to cover your expenses such as mortgage, property taxes, insurance, and still leave enough room for a profit. As an owner financier, the average rent determines how much you can sell the property for. Owner financiers don’t sell houses based on comparable sales in the neighborhood. Instead, the selling price is based on a buyer being able to become a homeowner for close to the same cost as renting. This is often significantly more than what houses are selling for in low-income neighborhoods.
Finally, lease option investors want look for middle-income neighborhoods. These investors are looking for people that have temporarily damaged their credit score. Preferably people with a previously good credit history but damaged their credit during the recession when they became unemployed or went through a foreclosure. Now, they have their credit on the mend and will be able to qualify for a mortgage in a year or two. Right now, they probably have saved enough for a down payment that can be used for the purchase option fee that is later applied to the down payment when they can again qualify for a mortgage.
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.