The Perfect Formula For Your First Investment Property
Now you’re ready to start looking for properties. But what exactly are you looking for? First, you need to understand the foundations of what real estate investing entails. That begins with some financial education.
But one question I get asked often is, “Where should I look for my first property?” This is just one of many questions you should be trying to answer when becoming a real estate investor. The following formula is one that Kim and I use when we look for both residential and commercial properties to invest in.
Take a Drive
Especially if you’re a beginner, it’s important to concentrate on an area close to home—one that you can get to know really well. Drive, walk, or bicycle around that area regularly. Is it growing or dying? Are there many “For Sale” or “For Rent” signs? Also, find two or three brokers who operate in that area.
You can find this out simply by seeing who has the most “For Sale” signs posted. Call these brokers and ask them about the area. What has sold recently and for how much? What do properties rent for, and who rents here? How long are properties typically on the market before selling?
Why Do You Want To Do This?
Because when a property comes on the market, you’ll know very quickly whether it’s a good deal or not, and you’ll be able to move quickly. In fact, if you really get to know an area well, you may even hear about a new property before it comes on the market and get a real jump on the competition.
My wife, Kim’s, first real estate investment was in an area close enough to our home that we could jog there. She’d walk, run or drive through the area at least three times a week to pick up any changes happening in the neighborhood.
Even if you have lived in the same city or town your whole life and feel you know every road and every building, humor me, and still hop in your car and take a ride. This won’t be a ride to simply look at buildings; it’s a ride to help you look at your town or city with what I like to call “real estate eyes.” Actually looking at the buildings is a minor thing at this point. This drive will help you to understand the lay of the land—the environment the buildings are sitting in—from many different perspectives. The drive is about location, location, location.
A good idea is to look not just at the residential area, but nearby commercial areas as well. Are there new or high-end stores opening in the area? Are there new office buildings being built or companies moving in? These could be signs that the neighborhood is improving or in demand, and you may be able to get in on the ground floor of a booming market. Start your drive with the goal of trying to understand the overall city from a real estate investment perspective. Be observant. What do you think is impacting real estate values in one neighborhood or another? Even if you think you know the area in which you want to invest, it’s still a good idea to understand what’s going on in other areas of your city or town. Those things will play a part in the value of the area you like best.
Once you think you know an area, travel there at different times of the day. How about evenings, weekends, and at night? Really take the time to see how people live in this area, how it is trafficked. You may be surprised. There are neighborhoods that not only have changed over time, but there are neighborhoods that change with the time of day. I’ve seen parts of town that are “happening” spots during the week and during lunch, but they are absolute ghost towns during the dinner hour and at night. If you’re looking for a great building for a daytime business, this area of town could be the right place. But if you’re looking for a building for an evening business, look elsewhere. Your goal here is to look at an area and “get it.” That means you get what it’s about, and you know what is a fit. Once you “get an area,” you will begin to be able to see the future. This is a gut response that may be helpful to write down. You’ll have an opportunity later to test how right you are when you talk to the experts who will eventually be on your team—appraisers, inspectors, attorneys, brokers, and builders.
When it comes to understanding the lay of the land, I look for what real estate pros call “the path of growth” in the market. Even in cities that as a whole are not growing, there usually are areas that are. How do you recognize the path of growth when it comes to commercial real estate? Look for the areas where home builders are buying land, where new homes are being constructed, and where elementary schools are being planned and built. City governments are a great resource for this information because they tell you where they are planning to build new facilities and where infrastructure is going in. You can also get good insight from the economic development officials in your city offices. It’s always interesting to see which projects they are the most excited about and what they see developing down the road.
City officials often can be very excited about urban revitalization projects that are underway and often help fund projects that jump-start the process. How exciting it is to think about being part of the solution to violence, crime, and urban blight!
Caution: These Kinds of Projects Take Time, Lots of Time
Not only is there the obvious planning, zoning, designing, and entitlement process that must happen; sometimes votes are involved. Then there is the intangible consumer acceptance variable that can take years. In my hometown of Phoenix, there were more than $800 million of revitalization projects built before I considered this area for investment, and the elapsed time to resolve them took more than twelve years. So stay cautious for a very long time because even neighborhoods marked for revitalization may remain in decline for years.
I should point out that some real estate investors make it their entire business to seek out declining neighborhoods. People who specialize in urban revitalization are just one example. That’s not my area of interest or expertise, so for my specialty—commercial office space—I stay clear when I see a lot of graffiti or closed businesses. That seems obvious, but you’ll be surprised how a quaint historic home that may have been recently rezoned commercial in a troubled neighborhood can still be compelling to emotional investors.
These buyers can easily talk themselves into a bad decision by thinking that purchasing this building will be good for the neighborhood, or by telling themselves they will live with the location because the building is so perfect. None of these arguments is good enough. Remember, it’s location first, no matter how difficult the dwelling is to pass up.
There’s a difference between a declining area and an area that is going to be revitalized. When you get the feel that a neighborhood is going downhill, stay away. If it’s on the upswing and that historic building is right in the center of it, don’t let your preconceived beliefs about the neighborhood hold you back. There may be an opportunity. Understand they call it real estate for a reason. You’re looking at the real estate first. That’s the key underlying truth to all of this. The building is second.
To me, an absolute must is to fully understand where the market is going, not just where it is today. It’s all about feel, and not getting in too early. What I mean by that is unlike some businesses where speed is everything, there is no need to be on the bleeding edge in real estate.
You don’t have to be first. You don’t want to be first; leave that to the biggest players who can afford the risk. There’s plenty of opportunity and money to be made by being second, third, and even twenty-third. Leave the bleeding edge to the big boys. In fact, if you’re a small investor who is starting out, never be first.
Editor, Rich Dad Poor Dad Daily