Über die Autorin bzw. den Autor

McGraw-Hill authors represent the leading experts in their fields and are dedicated to improving the lives, careers, and interests of readers worldwide

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

FLIP

McGraw-Hill, Inc.

Contents

Chapter One

After reading this chapter you will know how to

* Target investment neighborhoods

* Determine what elements make a good target neighborhood

* Select the target neighborhoods that are right for you

Would you buy investment properties in Kathmandu? Unless you live in Nepal, you probably don't have to think too long about your answer. And if someone pressed you for an explanation, it would be easy to come up with some practical reasons why not: It's too far away. It's too difficult to travel there. And what do you know about the Nepalese real estate market, anyway?

When successful real estate investors make decisions about where to search for investment properties, they apply some of the same reasoning you just did in ruling out Kathmandu.

In this chapter you will learn how to use a set of tried and true targeting criteria to determine the target neighborhoods that will give you the best profit potential for flips. In essence, you'll learn how to create a personal house-buying bull's-eye.

Defining target neighborhoods is a two-step process. In the first step, you'll identify the various factors that go into evaluating a neighborhood. We call these factors your targeting criteria. Some will be proven investment criteria; others will be more personal criteria. In the second step, you'll apply the criteria to choose your target neighborhoods (Figure 1-1).

WHY TARGET?

Targeting neighborhoods helps you focus your resources so that you can find the best possible investment property leads. Those efforts can be time-consuming and costly—all the more reason to identify and target the neighborhoods with the greatest potential for success (Figure 1-2).

We can't emphasize enough how important it is to target neighborhoods and become an expert on the properties found in them. Your decision making will be clear, confident, and quick. Even the best investors sometimes make avoidable mistakes when they invest in areas with which they are not familiar.

We've learned this lesson firsthand. We once bought a house that was literally just a few hundred yards outside one of our hot target neighborhoods where we'd done about a dozen rehabs. We were able to get the house at such a low price that we thought we'd have no problem making a good profit. But we didn't do our homework—the house was across a major highway. The rules that governed our target neighborhood simply did not extend to this area. Selling prices were falling and nicely remodeled houses were nonexistent. Eleven months later, the house finally sold resulting in a profit of less than $1,000.

WHAT MAKES A GOOD TARGET NEIGHBORHOOD?

It's worth pointing out that we're not necessarily talking about "hot" neighborhoods that are increasing in value rapidly. Flipping houses is primarily about buying at a great price and adding value with well-chosen improvements. If you also benefit from the appreciation of the house's value during the time you hold it, that's an added bonus. Just remember that if you rely on appreciation to make your profit, you are acting like a speculator, not an investor. As an investor, when you look for investment potential in different areas, you'll consider a variety of factors. The six most important ones we call The Six Neighborhood Targeting Criteria (Figure 1-3).

1. PROXIMITY

It is important to keep in mind that during the weeks or months that you're working on an investment house, you'll probably need to be there on a regular basis. Choosing a house in a distant neighborhood will take a toll on your ability to monitor or participate in the rehab. If you have the flexibility and free time to travel across town—or even across the country—by all means, go for it. But if you don't, you should absolutely consider keeping your projects close to home.

2. SELLING PRICE

Flipping an expensive house certainly has the potential to be more profitable than flipping a less expensive one, but it takes more money. You need the capital not only to purchase the home but also to fund the high-end rehab improvements. And these improvements take time, during which you'll have to pay taxes, insurance, interest payments, and other holding costs. There are people who will lend you money to flip a house, but there's a limit to how much you can realistically borrow (we'll cover this in the Buy stage). You don't want to waste time focusing on neighborhoods where the average price is beyond your ability to purchase, hold, and improve a property.

In contrast, the investment challenge in low-end markets lies in being able to buy the property, do the required improvements, and still have a margin of profit that makes it worth the risk. In addition, there tends to be a much smaller pool of interested and qualified buyers for these low-end homes.

One of the biggest factors in maximizing your profits on a flip is how fast the house sells: Every day you hold a house costs you money. Ideally, you want to sell the house in three weeks or less. So everything you do and every decision you make is geared toward the outcome of a quick sale. In general, the more potential buyers there are, the faster a good house will sell. You'll have the largest number of potential buyers if your house is near or just below the median home price in the area (Figure 1-4) and that is a great price point to target.

3. SALES ACTIVITY

The desirability of a particular area of town can be measured quantitatively by analyzing current housing sales information. Sales activity is a great indicator of a good target neighborhood. Houses just seem to sell faster in some sections of town, while for-sale signs linger in others. In this section, we'll explore the data that will help you understand what makes these neighborhoods attractive to buyers and which can help you determine whether a neighborhood is desirable for real estate investing.

To evaluate current sales activity in a neighborhood thoroughly, you probably will need a real estate agent, who has access to your city's Multiple Listing Service (MLS), to run some reports for you. The MLS is a membership database service developed by and exclusively for licensed real estate brokers and their agents. A good real estate agent will be an invaluable member of your team. In general, real estate agents like working with investors because serious investors buy and sell multiple houses in shorter time frames than most home buyers. Every business loves repeat customers.

The MLS data will provide a detailed picture of what has transpired over the last year or so in terms of market activity in your target neighborhoods. Figure 1-5 shows the nine key areas of information you can ask a real estate agent to investigate about the houses for sale or that have sold in a particular geographic location. When you see sales activity or a lack of it, you will want to understand the cause behind it. These nine areas should provide that insight.

You want to invest in neighborhoods where a fixed-up house won't sit on the market for months. When you target a geographic area, you'll want to have a good handle on which houses are for sale and why they haven't...