Selecting the Right Location and Investment Team

In this article I will Tal about the two most important investment decisions you will make, location and investment team. If you get these two decisions right, everything else will be a matter of process.

Location

The most important decisions you will make is the location, not the property. As long as you buy a property in a “good” location, all but the worst mistakes will be corrected over time through appreciation and rent increases. However, if you do not buy in a “good” location, you can do nothing to turn things around after the fact. Fortunately, selecting a “good” location is relatively easy if you use the right metrics.

  • Rent and Price Growth Rate - Inflation is constantly eroding buying power; each year, it costs more to buy the same set of goods and services. If you buy in a location where prices and rents rise faster than the inflation rate, your buying power will increase due to the increased rents. If you buy in a location where prices and rents are increasing below the inflation rate, your only option will be to decrease your standard of living over time. Also, do not rely on the rapid increases resulting from COVID; these increases are not sustainable. Evaluate locations based on the ten years preceding the COVID times compared to the current inflation rate (>5%).
  • Population Size - Greater than 1 million. Small towns rely too much on a single business or market segment.
  • Population Growth - If people are moving into a location, many things have to be right, including jobs and the cost of doing business. Do not invest in any location where the population is stagnant or declining.
  • Crime - People and companies will not move to locations perceived as dangerous. One source of cities to avoid is Neighborhood Scout’s 100 most dangerous cities.
  • Disaster Risk - Some parts of the country suffer frequent natural disasters. The best indicator for natural disaster probability is the cost of homeowners insurance. Avoid states with high insurance rates. Note, even if insurance pays for all the damage your property suffers, you still lose. When a significant disaster occurs, people and jobs move to locations where they can make money today. The location may take years to recover, or it may never recover. ValuePenguin is a good source for the relative cost of insurance by state.

If you select a location that meets all the above criteria, you are ready to look for an investment team.

Investment Team

If you needed surgery, you would not start medical school. Also, not just any doctor will do. You want a surgeon that specializes in the kind of surgery you need, not a general practitioner. The same is true with real estate investing. You want to work with an investment team that already has the skills and a proven track record of finding, qualifying, renovating, and managing properties. A good investment team will minimize your risk and save you time and money. If you try to do everything yourself, it will cost you more, and the odds of success are much lower. The place to start is with an investment Realtor, not an investment “friendly” realtor. Below are the skills and experience an investment Realtor and their team members provide.

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Finding an Investment Realtor may not be easy. Even in a large metro area, there is likely only one or at most two investment Realtors. To build a list of candidates, talk to property managers, cruise real estate investing sites, and seek out local investors, etc. Once you have a list, follow the diagram below to determine if they have the skills and experience you need. Start at the top and ask each question, noting their answers. If they are unable to provide a satisfactory answer to any question, go to the next candidate.

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If a candidate passes all of the above, you can be assured they know what they are doing.

Next Steps

You selected a good location and investment team. The next steps are:

  • Select the right tenant pool to target
  • Selecting and validating proeprties
  • Renovation
  • Property manager handoff

With a good investment team, all the items are their normal process. Trust your team and you should do well.