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Location, Location, Location
When looking at real estate investing there are lots of things you should look at – property type, age, construction type, deferred maintenance, value add opportunities, etc. But none of those is the most important factor. The three most important factors with real estate are location, location, location. Ok ok, I’m sure that’s a joke some realtor has heard way too many times.
But nonetheless, it’s true. Location is the only thing you cannot change with the property. You can fix it up, tear it down, repaint it, change the use, and pretty much anything else. But you can’t change the location.
This is why it is important to select the right location of the property, before looking at any other factor. Let’s look at how to evaluate this.
How to Analyze a Market
The location of a property is also referred to as the market. Markets can be broken into submarkets and even neighborhoods. Not all properties in Texas or any other state are created equal. Not all properties in a city are the same. Not even properties in the same neighborhood. Think of your home market. There are probably areas where one side of a street is much different than the other side. The same thing applies pretty much everywhere.
So let’s look at some important factors when evaluating a new real estate market. When evaluating a market we’re concerned with two areas: demographics and economics – essentially, who lives there, how many people live there, and how much money do those people have.
- Unemployment rate – the unemployment rate is important to you as a real estate investor because people need jobs to pay rent. But digging deeper, we’re concerned with more than just the current unemployment rate. We want to see a positive trend (or a lower unemployment rate). If fewer people are unemployed, that means more and people have jobs. Simple, right? Great. So we’ll look at the unemployment rate trends and make sure this number is declining over time (typically the past 5 years or so), or at least staying stagnant.
- Population growth – the population of the market is important because… well, you need people to live in the market to rent your real estate. Just as with the other criteria, we’re looking at trends. We want to see an increase in population over time, not a decrease. If more and more people are moving into the market, that creates a demand for places to live. So far, pretty simple, right?
- Population age – this is another factor that will tell us what’s going on in the market. Think of who fits the demographics of an average renter – typically younger people and elderly people. You can look at the age of the population and see what percentages fall into those typical renter pools.
- Job diversity – having many different employers or industries in the market will ensure that no one employer can go under, move locations, or layoff their workforce, single-handedly impacting the market. Think of an area that is dependent on one industry or company. Take Detroit for example – when the auto industry moved jobs and production to other countries, Detroit’s economy took a serious hit. Ideally, we want a diversified market so that no one industry has to support economics and jobs.
- Supply and demand – supply is the amount of real estate available, while demand is the amount of real estate needed. If the market has 1 million apartments and only 800,000 people, then it is in over-supply. Vise versa, if a market has 1 million people and only 800,000 apartments, then the market is in short supply. This is a simplified explanation, but you get the picture.
- Miscellaneous – here are where we look at things like property taxes, cost of living, landlord-tenant laws, etc. These are things that people consider when moving to the market, so it’s important to understand them.
If you consider these things when selecting a market, you’ll be well prepared to make an informed decision. This information is readily available on the US Census Bureau at Census.gov.
The Three Laws of Real Estate Investing
While the property you select must be in a good market, that alone is not enough to ensure it is a good deal. As Joe Fairless outlines in his book, The Best Ever Apartment Syndication Book, there are three immutable laws of real estate investing:
- Buy for cash flow, not appreciation
- Secure long-term debt
- Have adequate cash reserves
If you couple these three laws with selecting a strong market you have a recipe for a successful real estate investment. Just like everything else, there is risk involved when investing – this you know. The best hedge against risk is education. Learn as much as you can. Implement what you learn and take action. Use resources like Joe’s book and others, podcasts, real estate conferences, and networking to leverage other people’s experience. Do these things, and you’ll be well on your way to building a real estate portfolio that gives you the wealth and freedom to live the life you want.
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The Best Ever Apartment Syndication Book by Joe Fairless