MarketStats Blog

Identifying the right markets to buy in using real estate timing is the first step of buying.

Once you have identified a market however, you need to select where you want to buy your real estate investment.  All real estate markets have different neighborhoods, some more desirable than others.

There are two good ways to select the right neighborhoods to invest in once you’ve identified the right real estate market using real estate timing.  These aren’t the only ways, but they are good methods for smartly selecting where to do your real estate investing.

The first way is to buy where there are good schools. Most MSAs have different school districts, especially the larger ones.  But even the MSA where I grew up, Ann Arbor, which isn’t huge still has multiple school districts:  Ann Arbor, Ypsilanti, Saline, Dexter, Chelsea, Willow Run and so on.  Some of those schools are very good and some aren’t so good.  School districts can be very reflective of desirability.  If you buy close to good schools you are going to have more people wanting to rent your real estate investment during your hold period and you are going to have more people wanting to buy when it comes time to sell.  There is a trade off however, in that the areas with the best schools are also likely to have higher prices.  So you’ll need to find a balance between schools and affordability.  You certainly don’t want to be carrying a large negative cash flow during your hold period.  I hate negative cash flow!

The second way to buy is to look for up and coming neighborhoods.  If they have good schools that’s always a bonus, but in the up and coming neighborhoods you are more likely to see a younger crowd who is more interested in the quality and quantity of amenities, because most of them don’t have children yet.  Neighborhoods that are starting to see revitalization are great for this.  These buyers tend to prefer smaller, starter homes or even condos but they want lots to do around them.  Coffee shops, nightclubs, theater, arts, music and so on.  This is a kind of emerging market investing.  When the real estate timing is right and this type of neighborhood is up and coming you’ll see a rapid upswing in desirability.

Once you’ve identified the market you want to invest in you need to start doing the research to select the right area within that market.  The internet is a great asset to get you started.  I also recommend talking to some real estate agents.  Ask them about neighborhoods and resources to find out where the good schools are, where people want to live and so on.

In our first two articles on emerging market real estate investing we focused on the buying and holding parts of the transaction.  Here we are going to look at selling our emerging market real estate investment.  This is absolutely just as important as the buying and holding. You need to know when to sell, just like you needed to know when to buy.

If you sell too late the market will have already shifted on you from a seller’s market back to a buyer’s market.  When this happens home values start to decline.  As a seller this is not when we want to sell.  We either have to put in a big price drop right away to find a buyer or we end up chasing the market down and holding for a long time with continuous smaller price drops.  This results in lost profits and is not how we want to do emerging market real estate investing.  The proper way to do it is with real estate timing, just like how we bought.  The same market analysis that told us when to buy can also tell us when to sell. We can see this in the real estate timing charts at REMarketStats.

The best time to sell our emerging market real estate investment is BEFORE the market shifts.  In fact we want to sell before the market even reaches it’s peak.  If you try to milk every last bit of appreciation out of the property you are walking very close to that line of getting caught in a declining market, because the peak and the start of the decline are really very close together.  Instead, if we use our real estate analysis and sell when the real estate timing charts tell us to sell we’ll be getting out after having captured a very large chunk of appreciation but not at the top of the market.  This is a great way to make money and get out while there is still a buying frenzy going on.

When it comes time to sell, we do the opposite of what everyone else is doing.  We are selling when everyone else is buying. It makes life a whole lot easier when you are trying to find a buyer for your emerging market investment.  You have very little competition, in fact the buyers may be competing against each other to buy your property.  That makes selling so much easier.  When we sell we want to get the best value for our real estate investment.  That means no deferred maintenance during the hold period.  Make sure the home has some curb appeal. It also means you’ll want to use a real estate professional to help you sell.  If you bought in an emerging market then it probably wasn’t in your own backyard, it was in a market that was actually going to make you some money.  That means you won’t be trying to sell the house on your own, after all you can’t do showings in another city.  Besides, it’s much easier this way.  Let the professional do their job, that way you don’t have to put in all of the time and effort yourself of trying to get the home sold.  Our goal is to make money with our emerging market real estate investment, not have a lot of time consuming headaches just to save a few bucks.  If you bought with the proper real estate timing you will have easily made enough money on the property to avoid having to deal with all of those headaches yourself.

In the first article of emerging market real estate investing we focused on identifying our markets and buying the property.  Now we are going to look at our hold strategy.  Most people think that in emerging market investing we have to buy properties in rapidly appreciating markets with massive negative cash flows.  This is not emerging market investing.  That is emergED market investing – you are chasing the market.  I definitely don’t recommend this.  It’s much better to buy when a market is down, when everyone else is selling but the market is about to turn.  It makes it a whole lot easier to manage your cash flow.

I like properties that cash flow.  It makes life a whole lot easier in real estate.  If a property doesn’t cash flow you have to cover the difference. Every month.  God forbid you get a vacancy because then you are covering a whole lot of money and get desperate to find tenants.  I’ve found that’s when real estate investors start making mistakes.  In their rush to get tenants they take the first person to come along simply to cover that massive payment.  Usually they end up evicting later because desperate investors draw in deadbeat tenants.  It’s like deadbeat tenants have “desperate investor” radar.

If you really do emerging market real estate investing you are buying when prices are low and getting a deal.  Now in some markets you still won’t cash flow even at 20% down.  Those expensive markets are for investors who like more risk than I do.  If the market really is an emerging market the investor will still probably make a lot of money.  Myself, I would much rather pick a market that is about to emerge but also cash flows.  These days most real estate investments require 20% down if you are buying outright with a mortgage.  If you don’t have that much money for a down payment there are always some creative strategies like lease options, land contracts and subject tos that are good for little or no money down investing. By the way, those creative techniques are GREAT for emerging markets, your profits on those deals will be much, MUCH higher than if you do them in declining markets, emerged markets or any other kind of market.  Not only that but the deals are much easier to find too.

Most emerging real estate markets are not in our own back yard.  That means as an investor we want to take a national approach to our investing, look for the emerging markets with the best opportunities (remember to find them we want to use a real estate timing service, such as REMarketStats) across the country.  By being a national investor it means that we will definitely need a good property manager to handle our real estate investment.  If you find the property manager BEFORE you buy then they can help give you an idea of what the market rents will be so you can plan for your cash flow situation.  Not only that but you’ll want to budget for paying the property manager out of the rental income as well. Some people balk at paying for property management but I’ve found that it is so much easier, so much less headache and so much less stress than dealing with tenants yourself.  A good property manager is well worth their fee.  I’m not going to go into cash flow calculation here, but I will say that it is very important that you do the calculation before you buy.  Also make sure you budget for repairs and maintenance as part of your calculations (10% of the gross rent is a good amount to use) – nobody likes buying properties with deferred maintenance except other investors looking for a deal.

Cash flow isn’t our primary source of income for this real estate investment, appreciation is.  But it’s always nice to get a property that cash flows or at least breaks even.  Remember, if a property cash flows you can hold it forever and still make a profit no matter what the market does.

In part 1 I also mentioned buying properties that need improvements as part or an emerging market real estate investing strategy.  The timing of these improvements does make a difference.  You need to ask yourself if you need to make the improvements before you find tenants or when you are about to sell the property.  If you are making improvements before you find tenants they should be improvements that are necessary to place good tenants.  Improvements like remodeling the kitchen or bathrooms are better done close to when it’s time to sell.  That way the improvements are practically new and will appeal much more to your end buyer.  Our end buyer is how we make our real profit in emerging market real estate investing so we want a home that will appeal to them and sell quickly for the best profit.  And who knows if you make the right improvements your end buyer might end up being your tenant.  Then you won’t even have to pay a real estate commission.

The easiest way to make money in real estate is with emerging market real estate investing. With this type of investing you buy in a market that is about to start appreciating and you hold the property until it comes time to sell. It’s very simple, you make your money off the appreciation of the home (and hopefully some cash flow as well).

Let me go into a little more detail. To begin with you need to identify the proper market for emerging market real estate investing. You do this with real estate timing. You analyze real estate markets to see which ones are going up and which ones are going down. That’s no easy trick. The best way to do that is with a service that provides you the tools you need to do it, like REMarketStats. You want to analyze different markets and choose the ones that have the criteria you are looking for. Good criteria are things like solid population growth, strong employment or a desirable location. Maybe a new industry is coming to the area that is going to fuel a population boom. Maybe it’s a “newly found” resort destination.

Once you identify the general area, with the proper real estate timing, you need to find where in the location you want to buy your real estate investments. Every city, town, large metropolis, etc. has more desirable locations and less desirable locations. Obviously the more desirable locations will cost more to buy than the less desirable locations. If you buy in the best area you are going to pay the highest price and will have a whole lot harder time making it cash flow.  If you buy in the less desirable areas it’s easier to cash flow but the homes won’t appreciate as well when the market takes off.

I’ve found it’s better to invest in the up and coming neighborhoods, they aren’t as expensive yet but are starting to become more desirable.  Up and coming neighborhoods have good amenities but may not be as well established as the most desirable areas.  What types of amenities are we talking about?  It depends on who is going to live in the area.  If it’s young professionals you’ll want close promiximity to restaurants, nightclubs and other entertainment. These people like to get out and do stuff.  If it’s a family-oriented area you want good schools, playgrounds, parks and low crime.

Let’s review the steps so far:
1. We want to choose our emerging market for our real estate investing – we do this with real estate timing
2. Through real estate market analysis we choose the real estate market we want to invest in
3. We decide where in the market we want to invest – it’s best to focus on up and coming neighborhoods

The next step is to select a property to buy. Most people think that emerging market real estate investing means you have to pay full price for a property in a rapidly appreciating market and carry massive negative cash flow.  NOT TRUE!  True emerging market investing means you buy BEFORE the market takes off.  You are buying when most people are selling and the market is down but about to turn.  This means that there are LOTS of deals out there.  You don’t want to pay full price – you want a deal.  Make multiple offers on multiple properties and negotiate strongly.  It’s a buyer’s market.  Not only that but you also want to look for value options. Value options are things like the only home in the neighborhood without a garage, but you can build one.  The kitchen and baths haven’t been updated in 30 years – so it’s time to remodel.  The house is ugly and has no curb appeal – nothing that a landscaper can’t fix.  In a down market most people won’t put money in home improvements because the return isn’t there.  But if you buy at the end of a down market and put money in improvements you are going to see a return when the market shifts.  Remember in emerging market real estate investing you want to focus on buying deals.