In this episode, we’re going to talk about finding the right target market for your real estate business. I get this question a lot, and I’m going to do my best to answer it comprehensively.
Here are six important factors to consider:
- Cost: If you live in an expensive neighborhood, you need to consider whether you have or can come up with the money to invest in a nice house in that neighborhood. If you won’t be able to afford a decent house and its rehab in this expensive neighborhood, you should be looking to invest in a different area. When I started out, I didn’t have a lot of money and didn’t know how to raise money. I went to a bank and got a loan to buy a $40,000 house, and scraped together $15,000 for the rehab. If we had been looking to invest in a more expensive neighborhood, there is no way we would have been able to afford that initial purchase. We worked within the parameters that we had, and found a decent market in our area where we could afford to buy a property.
- Activity: You need to look at the real estate activity in that area. Are houses staying on the market for 6 months or even a year without being sold? That’s not a very hot market, and it’s not going to make it easy for you to sell your property after you rehab it. You should be looking for markets in which houses sell within the first 30 or 45 days. A house that sits on the market for months will completely eat up your profits in holding costs (insurance, taxes, utilities).
- Proximity: By that I mean proximity to where you live or work. When you are new, I don’t suggest investing in a property outside a one or two hour radius from your house. That’s not a wise use of your time, money, and energy. You need to learn this business before you start trying to flip houses outside your local area. Of course, there are exceptions to this. If you want to be a buy-and-hold investor and your area simply isn’t a good market for that, you could partner with someone who lives in a better area for your goals. But if you’re new and you’re on your own, decide on the maximum distance you’re willing to travel to visit a house consistently to make sure everything is done right.
- High/Low Prices: You should look for markets that have a large discrepancy between purchase price of houses that are in distress versus sale price of fully renovated houses. If a low-end house is selling for $100,000 and a fully renovated house is selling for $115,000, that’s not a good market to be in. You want to find markets that have a very large gap between foreclosure price and fully updated price: something like a foreclosure price of $50,000 and a fully renovated, up-to-date, top notch price of $150,000. The specific numbers can vary greatly depending on the area, but you always want to make sure those two numbers are not too close. Your realtor can help you do that research on the MLS.
- Density: How densely populated is the area? If you live in a rural area, you might want to invest in a more densely populated town or county nearby. In a densely populated area, there are going to be more reliable comps, so when you’re trying to calculate your ARV you will have more comparables to look at and you will know what you can expect your property to sell for. I am very skeptical of buying houses that are out in the country, because it will be very difficult to find accurate, useful market analysis.
- Familiarity: You want to invest in houses in areas that you are familiar with. You don’t want to end up buying properties in undesirable neighborhoods because you don’t know what neighborhoods are safer or more conducive to families. Now, experienced investors will buy properties anywhere and make it work. That’s good for them, but not for new investors. You should know your target market like the back of your hand and understand the crime rates, school systems, average house prices. You need to know these things so that when you’re buying a house, you know whether you’re likely to run into problems when you try to sell it.
Some people make an entire career out of just investing in houses in one part of one town. It can be done if you know the area well enough, and makes the process a lot easier.