Value may be easier to find than you think. A few days ago I read this article about Florida Mobile home buyers and thought, man; I need to get into mobile homes. To be fair, I am probably not going to get into mobile homes (certainly not because of this article), but it is clear there is value everywhere. This off the wall scenario happens all the time, heck; it’s what makes real estate an exciting business to be in. So if value is easier to find than you think, where do you start looking?
First, start in your own backyard. I have shared my views on out of state investing in a previous post, so it should not come as a surprise when I say that value can be found close to home. I say this because the small investor knows this environment best. Investing at home is a lot more feel, than numbers because an investor has developed a great sense of the market. As investors move further and further away, information gathering and financial modeling become the chief tool. Of course, this is not to say that you should not use these tools in local investing, however; it is to say you have other tools that may be more valuable (intuition and market knowledge).
Second, find the crowd and look to the peripherals. If you see an area that has grown rapidly, go another half a mile or mile out. If this area is still lying fallow, it might be a good place to invest. This takes a small bit of market timing because you don’t want to be on the very back end of a trend. However, this kind of investing can net significant gains for those of you who buy and hold. There will always be buyers who want to live in the mix, but can only afford to live close to it.
Third, buy the worst of the best. If you can afford the worst house in the best neighborhood, you can usually find great value there. In good markets, great neighborhoods tend to get hot fast. Finding the worst house in this neighborhood allows you to get in cheap (relatively speaking), add some value, and rake in the profits. Be cautious here though. The best neighborhoods also tend to take the biggest hits when the market takes a downturn. Again, this is all probability here, so you can probably point to areas where this is not the case, however; more often than not it is. Also, please note the inverse of this statement is the worst possible investment strategy. NEVER buy the best house in the worst neighborhood (or even an average neighborhood for that matter). As an investor, strictly speaking, your job is to add value. You can never do that to the best house in the neighborhood.
Last, read beyond the information and act accordingly. By the time you read about a hot market, it is almost too late to start investing or a great time to sell. This is what I call the information paradox. Everyone seeks information about an area from a variety of sources. Even the laziest investor reads the Wall Street Journal, CNN Money, etc. Additionally, for information to be reported it has to be abnormally hot already. Test this theory out in markets you are unfamiliar with. For example, I am not very familiar with the Las Vegas market. About two years ago (maybe a little less), I read about the condo boom in Las Vegas. Less than a year later, I was reading about the condo bust in Las Vegas. If I decided to pack up and invest in Vegas, I would have been hosed.
This is not to say that reading is not important, but to say that not a lot of real estate value can be found in these mediums. They are great for macro trends and strategic planning, but please don’t go running after a market that you see in the paper or on television. I suggest reading trade journals and seeking out your own local trends. Word of mouth is also very good here. This is another blog subject, however (perhaps tomorrow?).
If you only take one thing from this article, remember, small investors should be value investors. If you always find yourself looking for the next good investment, try some of the strategies mentioned above. The value of an investor is his/her ability to find the right property. Good investors find more than bad investors and these are just a few of the strategies they employ. Happy hunting!
jf.sellsius says:
Excellent advice Michael. Opportunities are available in any market if you know where, and how, to look. Enjoy reading your posts, probably because I agree with most of what you say. Makes it hard to comment though, beyond “excellent advice”. 🙂
February 7, 2007 — 10:04 am
Caleb Mardini says:
Michael,
You’ve done a great job of putting all this information together in one spot.
I think working locally saves a lot of energy and time as well. It’s like you said, there are more resources available in general to the investor. But don’t go for what is already considered hot necessarily be cause it’s likely already heated up too much.
Good info!
February 7, 2007 — 3:01 pm
Joel Carignan says:
Sorry folks, I beg to differ. I live in Stockton, CA; ranked by Money magazine as the worst place to invest in ’07. I’ve been working on my portfolio of investments for about 3 years now and I am fairly sure most of the value was sucked out in the boom/bust. There simply are not properties that can cash flow with a reasonable down payment(10-20%).
I cant help but look elsewhere for value investments. Places in the Midwest look like champagne dreams from out here. Small apartment buildings that can net $1000/mo with only $9k down. I don’t understand why more investors aren’t jumping ship to buy elsewhere? So what if I have to settle for 90% market value b/c I don’t know the area as well as a local investor. If the numbers work at 90% market value then a deal is a deal.
I cant help but think that will all of the advancements in technology and the low cost of airfare that investing out of state (CA) can be quite profitable; even after the hurdles of absentee ownership.
Good article above. At the macro level, the RE markets are fairly efficient. It’s the micro level that allows for exploitation of inefficiencies.
February 9, 2007 — 8:48 pm