03 Dec 14 Mistakes New Real Estate Investors Make: Part 4 VIDEO
Hey guys, Billy Epperhart here. I want you to know my team and I are excited about our vlog! Remember, our goal is to help you make sense of making money to make a difference in the world. So as we teach on real estate, we’ve been talking about the fourteen mistakes that every beginning investor makes. Today we’ll cover mistake #6. Check out our previous series here: click me!
Mistake #6: Bypassing Low to Moderate Income Neighborhoods.
Let me tell you why this is a big deal. One of the reasons that’s a big deal is because in the low to moderate income neighborhoods, you’re going to find your best cash flows—that means the percentage return you’re going to get every month in your rent. So let’s say your PITIM (principal, interests, taxes, insurance and management) were costing you $700 a month. Then typically in a low to moderate neighborhood you want to see $150 minimum per month positive cash flow over and above that $700 cost. That means you would have positive cash flow of $150 a month.
Now, really I like to see $300 a month. So if it was costing me $700 a month to pay for the property, then I like to see about $1000 a month in rent. Some people say, “Wow, that’s amazing! That’s high.” That’s why it’s important to not make the mistake of bypassing a low to moderate income neighborhood. Those neighborhoods are typically where your best cash flows can be found.
Everybody likes the trophy property that you can go show to your friends and say, “Wow, look I own that.” But the truth is, it’s the bread-and-butter houses—and sometimes just a tad below the bread-and-butter houses—that are actually giving you your best cash flows. Don’t automatically skip the low to moderate income neighborhoods just because they don’t look as nice!
If you want some real advice: you really want to focus on the moderate. But if the moderate is not giving you a positive cash flow of $300 a month, then you want to start looking maybe just a little bit lower. Or make sure you’re working harder with understanding the situation of the seller and the condition of the property in order to get a better deal on the property.
The next reason to not bypass is that, especially in moderate, bread-and-butter neighborhoods, your appreciation is pretty good. What that means is that the houses will go up. So when I advise my own children about their personal homes, I say, “Buy as much house as you can reasonably afford and hold that property long term.” What happens is that the higher you go up in classification of neighborhood, then typically you’re going to get the best appreciation. Each step you go, low to moderate to expensive, the greater percentage of appreciation you get. That said, moderate income neighborhoods typically appreciate really well as long as the real estate market in general is moving there.
Another thing I like about low to moderate income properties is that, because the cash flow is good, the property is easily flipped to other investors. That means that if you show someone, another investor (not a retail investor), they’ll be attracted to the cash flow. So let’s say you want to make a quick $20,000 by just flipping out. Well if you’ve established good cash flow, then other investors are going to buy that cash flow—especially in moderate neighborhoods. Some investors stay away from low income neighborhoods. This means that you can not only just sell it or rent the property, you can flip it to other investors because of the cash flow.
Now this is worth the price of the ticket. If you want a nugget, here’s a nugget. Remember this: the lower you go in income in neighborhoods, the more management is required. So let’s say you have an expensive neighborhood, a middle class neighborhood, a moderate income neighborhood, and a low income neighborhood. The further you go down that stair step, the more management, control and watching the property has to be increased. It has to be managed more closely. I just want you to know that and I’ll talk about this in more depth later.
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This is Billy Epperhart, I just want to tell you we appreciate you tuning into our blog every week. I’ll be back next week to address another mistake beginners often make. Look forward to seeing you again. Thanks for watching!
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