CASH FLOW TRUMPS BEST LOCATION
Not every property that looks run-down, ugly and distressed is a gold mine in disguise. In fact, if you were to purchase many of the so-called “fixer-uppers” chances are very good that you’ll end up with only the shaft. I’m not trying to slow down your efforts to buy diamonds in the rough. What I am trying to do is help you understand that there is more to it if you intend to make any serious money doing this stuff.
In my own efforts to find fixer properties that fit my investment criteria, I’m constantly looking for specific problems or conditions. I want to acquire properties that I can transform into positive money-makers. This transformation can be the property’s physical appearance or it can be a restructuring of its financial condition. Also quite common for me is changing (removing) the people who occupy the property. More often than not I’m doing all three types of transformations at the same time.
“You don’t get big paydays simply because you own real estate. “
You don’t get big paydays simply because you own real estate. You earn big paydays from doing something that increases the value of real estate. A value increase doesn’t necessarily have to be a big change in the present market value. Even if a property doesn’t go up a nickel in market value but is made to produce more net income from rents, you’ve created some additional value.
As you search for investment properties, you must make your decision to pursue a deal or pass it up based on your knowledge of what you can do if you own the property. Many folks pass over solid money-makers because they don’t understand the various ways they can profit.
One of the most common examples I can offer is the case for buying only those houses without concrete perimeter foundations. That’s good sound advice as a general rule. However, there are some exceptions. I just happen to own quite a number of them. They produce the highest cash flow of all my houses. The reason is simple. I only paid about 50 percent of what equivalent houses with perimeter foundations cost. As a result, the mortgage payments are only half as much.
However, the rents are about the same as ~y regular foundation houses. It’s the same Idea as buying mobile homes for rentals. You can buy them cheap and rent them for markups of two or three times higher than standard foundation houses.
I’m always concerned with location. I want good location for a specific plan I have in mind. However, all my plans are not the same. They all have the same objective – to make profit – but the way I do it can vary with different properties.
. Some houses are excellent long-term Investments. But don’t try to outguess the future. Don’t bet the ranch on your long term (10 years or more) predictions. It’s still Just a guess. With long-term investments in top locations, you can expect to pay more to acquire them. Even if the property looks terrible the competition will keep the price higher because of location.
On the down-side, higher acquisition costs and bigger mortgage payments can cost you a lot more money and take longer before you realize any profits or cash flow. This is important because mom and pop investors need cash flow first and long term profits later on.
I like to think about locations as “A” “B” and “C”. “A” locations are the best. “B’: will be the local average and “C” is a stone’s throw from the county dump. With some study and driving around, you can easily determine these locations in your own investment area. Investing in “A” locations is fine, but it generally takes more cash. My choice is “B” locations, but I always look at a “c” to make sure I don’t miss anything exciting. I stay away from HUD projects, high crime areas and places where I don’t feel safe being there.
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