Where to Invest?

When it comes to finding great real estate deals, I am a firm believer that you can find deals in any market and any time. But what is the probability that you can cherry pick from many home run deals have little competition and multiple exit strategies? The best markets allow you to consistently find successful deals, create efficient systems and duplicate over and over. The media has a much different approach in that they look at hot markets speculatively as ones that will appreciate, our approach is much different. To identify markets to invest in it is recommended to have not 1 or 2 of the following, but all 4: Little chance of depreciation, lots of available deals, low competition, multiple exit strategies.

Probability of depreciation – If you haven’t heard of PMI, Private Mortgage Insurance, let me introduce you. PMI provides insurance to lenders to protect them from buyers who default. PMI also applies leading research, analytics, and pricing principles to manage risk concentration, and release a monthly market review and quarterly Market Risk Index report. The PMI U.S. Market Risk Index score translates to a percentage that predicts the probability that house prices will be lower in two years. Based on this report many of the hot areas during the boom such as CA, Vegas, FL, etc have a High probability of lower home values in 2 years. However, many areas of OH, TX and the Midwest have Minimal risk rank.

Lots of available deals – It is safe to say that the US economy has impacted every market in the country. Foreclosures have hit all time highs and many areas have an oversupply of opportunity. Some areas have more deals than others, but there are plenty of distressed properties out there.

Competition – Have you ever been in a bidding war? 5-10 offers and the seller counters or asks for best and final? I have experienced this many times and almost always the property sells for much more than I am willing to pay. Competition drives up prices. A perfect example is the way prices soared in hot areas like CA, Vegas and Florida. Homes would be put on the market for 15% higher than the comparables justify and still multiple offers as much as 20K over asking price. Investors are in the best situation where they are the only offer and thus have much more leverage in negotiations. My experience is that there is a lot of competition in the desirable areas that were very hot during the boom such as CA, Vegas, Florida, TX etc. Other less desirable areas have less speculation and competition which often results in lower purchase prices for distressed properties. Many smaller cities and areas of the Midwest such as OH have much less competition.

Multiple Exit Strategies – I have written about this topic in the past articles. Having multiple exit strategies is often crucial to avoiding loses. If you are unsuccessful flipping a property you may be able to rent, lease option and even get a lower payment or take cash out with a refinance. Or if you cannot find good property management or good tenants then you can flip or wholesale the property because you have plenty of equity. Multiple exit strategies give investors backup plans if your 1st exit is unsuccessful. Simply put, multiple exit strategies will lower risk, not to mention, let you sleep at night. Many high priced areas are difficult to cash flow and have multiple exit strategies. Again, many smaller cities and areas of the Midwest such as OH have an oversupply of deals with tremendous equity, tremendous cash flow and multiple exit strategies.

Summary – It is strongly recommended to identify areas with all 4. High priced areas that were hot during the boom have a high probability of depreciation based on PMI’s research, there is a lot of Competition and Multiple Exit Strategies is difficult to achieve. While there are many foreclosures in CA, Vegas, Florida, etc, they are not areas that are recommended. Many people will do well on deals, but many deals will also tank. TX is an interesting market as it is very stable. You can achieve multiple exit strategies but there is a lot of competition fighting over the available properties. Many smaller cities, areas in the Midwest and OH however hit on all 4. Minimal chance of home values decreasing, tons of available deals, low competition and ability to find deals with tremendous equity and tremendous cash flow. The success of a deal is still dependant only on that specific property and not the market as a whole, but the Midwest and OH are the areas strongly recommended as areas to invest at this time. Check out some current deals we have done in these areas with tremendous numbers here http://www.realreturnrealestate.com/index.php?option=com_content&view=category&layout=blog&id=57&Itemid=88.