There is a trade off that exists when it comes to the types of property and locations in which to invest. If it were every investor’s choice, they would only invest in the absolute most desirable areas and neighborhoods. However, sometimes due to demand and valuation, finding a suitable asset that meets your criteria can be more difficult.
C-Class and Lower Neighborhoods
On one extreme of desirability, some investors primarily focus on cash flow in lower-class neighborhoods. These properties, due to their lower acquisition price, may produce more cash flow, but have little chance of appreciating in value over time because the neighborhood is not desirable. The added concern here is that over the time of holding these types of assets, the investor is at greater risk of losing value if the neighborhood is declining in attractiveness and population.
There are many investors that are highly skilled and sharply focused on investing in tough neighborhoods, and this is great for those communities. Perhaps it is a community that they know and love, or one that they grew up into. It may be their way of giving back and helping to support and improve a neighborhood that has not been the safest and the most conducive to thriving for its residents. Investing in struggling neighborhoods is certainly a niche and takes skills and influence. Rather than go this path, my preference is to invest in growing communities but give back to areas that need the help.
High-Demand Neighborhoods
If you are only focused on cash flow, perhaps the above strategy of getting low-value assets that cash flow well with minimal appreciation upside works for you. However, for me, I prefer to invest in more highly desirable neighborhoods and sub markets, those that are attracting population growth through jobs and other city features such as beaches, lifestyle preferences, restaurants, etc. I am looking for markets and neighborhoods that are poised for continued population growth and demand for housing. The areas that will be sought after for many decades from now.
Have you ever had one of those moments where you imagined that, knowing what you know now, you could go back in time and make a decision or invest in something? Some would think to buy Apple stock. Others would invest in California and New York. Of course, hindsight is 2020, but there are always emerging markets, sub markets and neighborhoods that are poised for growth well into the future. Today, people are migrating en masse to major markets in Texas, such as Austin.
Right now, as I described in 3 UniquePhenomena Brought by the Pandemic, cities and employment are changing forever with migration to warmer climates and more opportunities to work remotely. If you are taking note, hopefully, you are preparing to take advantage. Companies and people are moving out of California and New York and moving to suburban areas and cities within states with lower cost of living and warmer climates. As transitioning employees and their families are doing their research, they are learning of great neighborhoods in these cities where they can thrive and live safely and comfortably.
These are the great neighborhoods in which I plan to invest. There is a path to progress and a catalyst for that growth and much value creation and demand in these areas for years to come.
Choose Your Best-Fit Strategy
If you are a beginning investor, I encourage you to seek high-demand areas for your first investment over low-value, high-cash flowing properties and neighborhoods. Not only will the headache factor be less, but desirable neighborhoods drive continued migration and appreciation (fundamentals of real estate investing). Of course, any investment should produce cash flow and not be made on the basis of appreciation alone, so a balance must be struck.
