THE BIG PICTURE
INVESTING STRATEGIES
THERE’S A METHOD TO DETERMINING WHERE AND WHY TO BUY SINGLE-FAMILY HOUSES.
Finding the Bull´s-Eye
by Rob Caldwell
I
find reasons to buy houses that only make sense to them. Many times (and I’ve seen this WAY too much) people just flat fall in love with a house, or a neighborhood, and not for the reasons that make solid investment sense. Real estate investing is no different from any other form of investing. Targets (acquisitions) should be considered based on the fundamentals of the product and market performance. Take it a step further and separate yourself from the emotional attachment you may have with real estate. Try to think of houses as if they were widgets. Imagine you are in a busi- ness and those widgets are your inventory. In order to make money and maximize your profits with your widgets, you must buy the widgets wholesale—a price lower than that for which you intend to sell them at retail. This must include room for expenses and a reasonable profit for you. But you can’t invest in just any widget. The best widgets are in high demand and can be rotated out of your inventory as quickly as possible. Otherwise, you’re losing money in holding costs—every single day. You should approach your real estate investing plan with the same steadfast commitment as in the widget scenario. When looking at any house you are considering ren- ovating and reselling, or holding as a rental, remember the following: NO. 1 Leave your emotions at home and forget the episode of the HGTV show you watched last night. Remain practical and DON’T fall in love with the house.
recently met an investor of sin- gle-family properties who made this statement when I asked him where and why he buys houses: “I am very specific about the single-fam- ily homes that I invest in. I only buy three-bedroom, two-bath properties built between 1985 and 2001. And they must be located north of Main Street between Elm Street and Washington Drive, and not one block further south from Sixth Street. I will not buy anywhere else.” He was very serious and implied that his approach was quite prudent for him. “It’s close to where I live, and I know the area pretty well,” he explained. “So you are holding these as rentals?” I asked. He looked at me with a quizzical look and said, “No, I’m flipping them!” “Must be a hot area. I bet you’ve bought a lot of houses there!” I said. “Well, just two. In the last two years,” he said. Over the past 20 years of buying sin- gle-family houses, I have heard similar explanations on dozens of occasions. Most of the reasons why these single-family real estate investors go after what they buy have nothing to do with market performance and investment fundamentals. It’s generally what’s most comfortable and convenient for the investor at the moment. Do you know anyone who would apply this personal basis for investing in the stock market? Not someone who realistically expected to be profitable, that’s for sure! But for some reason, when it comes to real estate, people tend to get emotionally involved and
NO. 2 Smartly consider the neighborhood and the area around the house you are reviewing. Real Estate 101 = Location! What’s going on around this house? Is the area improving, stagnating or declining? Can you get a sense for what the house and the neighborhood will look like in 10 years? NO. 3 Is the neighborhood predominately owner-occupant, or rental? Is there consistent pride of ownership on the majority, if not ALL of the other houses? NO. 4 What is the average DOM (Days on Market) for houses similar to this one? Have there been excessive discounted sales such as foreclosures, REOs or as-is? Only use comparable sales data for houses that are similar in age, structure and configuration to the house (subject) that you are consider- ing AND that were sold in repaired or upgraded condition OR needed no work when they were sold. You can usually find this information in the listing descriptions. NO. 5 When considering repairs and upgrades, don’t fall into the trap of “over-renovating” with items like granite and stainless steel if it doesn’t make sense and there is no precedent for this. Converse- ly, if the bulk of the houses in the area were sold, for example, as “newly renovated with modern improvements and updates” and consistently described as having “granite countertops and stainless steel appliances,” then you need to account for these upgrades in the repair estimate for your project.
34 | think realty magazine | may :: june 2016
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