Ask Realtors to name the most important consideration in buying property and the answer will be the same: location, location, location. The idea is as old as housing itself. It was the cave up on the hill versus the cave down by the creek: One caveman didn't have as far to go for water, but he was flooded out once a year. This was the first move-up buyer.
In the Where to Live book series, which scores neighborhoods by city, location scoring is based on a good economy and five vital elements:
Value (as perceived by the buyer and his budget)
Convenience to the buyer's universe (job, family, friends, fun and faith)
Amenities (restaurants, a good supermarket, the bank, post office)
School district (even if the buyer doesn't have children, good schools are an indicator of a community's self-image and reinvestment in culture)
Beauty (people like to live in pretty places)
Using a rating from zero to five stars, the formula puts art and science behind the word location. This obvious formula nails the best appreciating neighborhoods. The data is invaluable to buyers, and it places an objective tool in the hands of Realtors that allows anecdotal projection of values.
NEIGHBORHOOD METRICS
Who lives there? Why? What is the turnover? Knowledge of prices and price appreciation over multiple years as well as tax and typical rents is crucial. Although such research may seem like a lot of work, it can pay out in the number of recurring transactions real estate professionals handle for multiple investors.
BARGAIN HUNTING
Investors who buy cheap typically get similar results. A bargain in a modest neighborhood may not really be a bargain or even a good investment deal. The numbers and returns do not lie.
Investors should always try to acquire the property under market value. However, it is often smart to make the highest offer on a dump in a great location. A "buy, over-improve and hold" strategy in historic inner city neighborhoods can pay handsomely. Investors must clearly understand what improvements will cost and how they will add value over a specific time period. Unlike Enron or WorldCom stock, the reality is if there is dirt involved, the investment can never go to zero value, short of an earthquake swallowing the property. Well-located land is a very finite resource; they aren't making any more of it. The question is how long an investor will need to hold the property to realize a gain.
Boomers have changed the overall market, as they no longer assume that Wall Street knows best. Wall Street does not want the populace to wake up to the advantages of real estate investing. Generally, a wise, non-traded real estate investment, by virtue of mortgage leverage, can deliver five to 10 times the annual cash-on-cash returns of a typical portfolio based on stock, bond funds or real estate investment trusts. When purchasing a stock, full price is paid at the time of purchase. With real estate, a buyer typically puts down a fraction (10 percent to 20 percent) of the total cost (leverage). Historically, any gains have been incorrectly calculated on the total property price, not the down payment and cost of any improvements. The return is properly calculated as the cash returned on the cash employed, or cash-on-cash return.
ADVICE ANACHRONISM
Most financial managers have little training in real estate investment. They are not licensed and earn fees selling stocks, bonds and other financial instruments. The inverse can be said for real estate professionals. Neither will talk to their clients about investments if they are not licensed to provide advice or sell so individual investors have to find their own way.
Newcomers to real estate investing both Realtors and investors visit an investment club, talk to as many well-informed people as they can and listen to which experts' names are being repeated. Beware of people in the "teaching, not doing" game who try to sell the new investor on seminars, books and tapes. Many people who buy into these offers never buy a single piece of real estate.
MONEY DOWN AND MONEY IN RESERVE
True real estate investors do not buy into the "no money down, millionaire by midday" pitches advertised in newspapers. Home buyers are always taught not to over leverage and to maintain a reserve. It is important to put enough money aside to support a property for six months in the event a tenant is unavailable or an investment is necessary to make the property rentable or sellable.
STATE OF THE MARKET
Real estate investors and the processes that have sprung up around them are models for where much of real estate will go. These are part technology and part human factors, but the most important aspects are trust, education and service. The real estate professional who embraces these changes will be a highly sought-after provider. After all, fortune rewards the inquisitive.E-mail me at RealtorChris@msn.com