The location of your property is crucial to its ability to provide a consistent income and to appreciate for years to come. The two main factors in analyzing a property's location are the type of neighborhood and the area's economy. The investment that offers the highest ROI without significant risk is the best place an investor can put his money. The higher your ROI, the greater your positive cashflow. NEIGHBORHOOD
When an investor purchases a property to be a rental, he is usually planning to hold on to the property for a number of years. This is why the type of neighborhood is so important. Properties in slums and ghettos do not appreciate quickly. Often outpacing the area's growth, these neighborhoods also grow in crime, drugs, prostitution and filth. The type of tenant landlords can attract is limited. Hardworking, clean, law-abiding, rent-paying tenants do not want to reside in this type of neighborhood. The slums are then left to those who are incapable of qualifying for the more desirable neighborhoods due to their history of poor credit and crime. Upper-class neighborhoods do not typically produce enough income to pay for themselves. The most profitable neighborhoods are generally the upper lower-class neighborhoods; not the slums, not the lower class, but the upper lower class. What is an upper lower-class neighborhood? Residents of these neighborhoods are clean, hardworking, blue collar employees. They do not have the luxuries of the middle and upper class, such as boats and RVs, but they usually take care of what they do have. One of the best indicators: The cars that are parked outside the homes and along the streets. Are these cars mobile? If the tires are flat or they appear to have not moved for some time, or there is a collection of broken down vehicles on the lawn or the side of the property, this is usually the wrong neighborhood to invest in for rental properties. A good neighborhood may not have breathtaking landscaping or BMWs parked outside the homes, but the yard will be trimmed and free of trash, and the cars will appear to be in good working order. Investing in the right neighborhood will help to prevent attracting undesirable tenants, preserve the property's income stream, and ensure appreciation commensurate with the surrounding area. ECONOMY
The area's economy is crucial to preserving the quality of the investment. Over time, economies can change, companies can go out of business, new companies can move into town, the employment rate can rise or drop, interest rates can fluctuate, etc. Changes to the economy will affect a property's value and income stream. Although it is impossible to be sure of what the economy is going to do, you can analyze the degree of risk the current economy poses on an investment. You will need to determine what is supporting the area's economy. If the property is in an area where there is only one main source of income, such as a factory, what would happen if that factory were to shut down? If there are no other sources of employment, the population will decrease as people move to other areas to find employment. Without enough people needing places to live, vacancies will increase and rents will have to be lowered. Without the influx of new residents, real estate will go down in value, making it impossible for some home owners to sell their properties. If a property no longer pays for itself and cannot be sold, an investor may end up losing the property. This can be prevented if the investor buys real estate in areas that are somewhat economically diversified. On the other hand, purchasing real estate in areas in which the local economy offers little support variety is often inexpensive. In this case it only takes one large company moving into town and the property owners in these areas can experience significant appreciation and rental income increases. Investments made with this kind of speculation need to be done on more than just a hunch. The investor needs to be fairly certain of the upcoming changes that the economy is facing before delving into investments of this caliber. Novice investors who cannot afford holding on to a property that's not supporting itself should avoid speculating until they have gained adequate experience and net worth to support them in this type of investing. |
