The Location And Real Estate Investment Return Expectations

July 26, 2009

You can't change the location so pick it carefully. Your investment performance and source of the return will depend on it.

Do your research, drive the neighborhood and follow your instincts.

There is nothing wrong in buying in a declining area as long as you calculate that into the performance scheme and be ready for the added risk. Ask yourself where is the money, the return going to come from? In a declining area it's not coming from appreciation. In fact, the property may be losing value for many years ahead. What must make up for it is cash flow, but as a new investor or even a seasoned investor why would you put your self into such a risky investment?

At the other spectrum you should expect to pay more for a property that is well located. Your return in dollar terms may not be any better or worse even though some investment measures will be lower. What you gain is either appreciation, repositioning or redevelopment potential.

Then there is the middle where market knowledge, neighborhood know how and investigation come in and can be used to substantially improve you investment return and lower risk. This can be something like a house which can go commercial or a multifamily project which can be replaced with high end condos or remodel to attract a higher paying customer and so on.

Remember to keep your eye on the real estate vs. the building. While you are buying the entire property, land and all the building can be improved or changed while the land cannot.

Do your research, drive the neighborhood and follow your instincts.

Here are a few questions to ask yourself while driving a neighborhood.

1. Overall upkeep and condition of the neighborhood.

2. Condition of the buildings in the area.

3. Quality and type of cars in the area.

4. Businesses - open or closed and types.

5. Landscaping and cleanliness.

6. What are the good points.

7. What are the low points.

8. What is the outlook for the next year, 5, 10+ years.

The answers to the questions will help you make a better decision. If it happens to be a property that will lose value then it has to make it up by providing some other source of return. What about in 5 years? A lot of changes can occur in the future: the risk in a declining neighborhood is much greater then many should take on.

This is a sampling of the questions you should ask. I have a more detailed guide which I can sent to you.

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