I am sure that you’ve heard the old adage in real estate investing that you should buy the dog in the neighborhood. Do you know what I mean by that? What I mean is that basically you want to go buy a house in a neighborhood that has more expensive homes and the one that you’re buying.
The idea is that as the prices of the homes and value of the homes soar in that particular neighborhood it will automatically.
You see there is more room for the lower end homes to appreciate in the top end homes.
The top end homes will compete with the other top end homes. It sets the bar. But the margin for the lower-priced homes is much greater because the upward mobility of the pricing structure is in the seller’s best interest.
In other words the top end homes can appreciate by $50,000, from $250,000-$300,000 where as the bottom end home can appreciate from $150,000- $235,000. Even with such an increase it wouldn’t price itself out of the market. That is because there are top end homes that are worth so much more.
I believe the difference comes into play when you consider the value of living in that particular neighborhood with higher end homes.
But there is a problem. It is hard to find these “dogs” in neighborhoods.
You see there is a differential between the top end of the homes versus the bottom end of the homes. There’s more margin and profit in the lower end homes than there is in the top end.
The problem is that many investors go for these types of homes. What I found out in the marketplace at least in my local market is that often times the “dogs”are so neglected that the amount of revenue that you would have to pump into the home in order to turn it around would be enormous.
You have to get the numbers right otherwise you’ll end up spending all of the money that you could make just in rehabbing the place.
This is a real problem. It is not to be underestimated. It would be ludicrous to think that banks and other organizations that specialize in these types of rundown properties would be clueless in terms of what it would cost to rehab the property.
I know that homes are supposed to go based on market price, however, often times it has more to do with the potential money that can be made. Hard example would be a neighborhood where the per square foot price is running $125. There may be an abandoned property in that neighborhood that they want to sell at $106.
When you really calculate the cost of rehabbing the property you might realize that it should cost about $80 a square foot because so much work needs to go into it.
But depending on who owns the property they may or may not be in a rush to sell it. Often times banks don’t make great business deals. They will willingly sit on a property for an enormous amount of time.
I call this the BF syndrome which stands for the bigger fool syndrome. This means that there will always be a bigger fool to spend more money on something than you.
I recommend never losing track of what you are willing to drop into a property in order to make it worth your while.
One of the biggest things I’ve done wrong in the real estate market is that I assumed that there won’t be a deal to find next week.
An old real estate guru one said that a deal of the lifetime comes along about once a week.
If you maintain an abundance mentality, you won’t be hooked and roped into bad investment choices.
Although I’ve heard that most bad decisions regarding real estate has been made selling a property not buying a property. The rationale behind this is that if you could hold it long enough it will recover any mistakes you made by buying too high.