Investors and Rehabbers have options when choosing real estate markets
Real estate Investors and Rehabbers have many “markets” to choose from. Price point and location or neighborhood offer different opportunities and, for all practical purposes, price and location will define that market. It is always important to conform with competing properties. To do otherwise is to court disaster.
As we say in the real estate business: “What do the ‘comps.’ or comparables tell us about the market?” To succeed, we must buy and fix and sell profitably for a price that compares favorably with similar properties within the immediate neighborhood.
Prospective home buyers have differing housing expectations
Customer expectations will differ according to price and location. Most all neighborhoods are ‘value driven’. That is to say prospects are looking for all the features of housing anywhere: sound construction, little or no “deferred maintenance”–everything is fixed that needs fixing–and affordably priced given the demographics of the immediate neighborhood.
Affordable Housing is the Investor-Rehabber’s ‘Sweet Spot’
Affordability, then is the underlying determinant that dictates just how far we go when we ‘buy and fix’ homes for resale. The Rule of Thumb is: the cost of home ownership should not exceed 30-35% of household income.
It follows, then, that in a neighborhood with median household income of $60,000 per year, home price and related costs of home ownership should amount to about $20 thousand per year, or $16-1700 per month (including mortgage, taxes and insurance). Buy, fix and offer a home in that neighborhood that will cost the home buyer $1700 per month, or less, and it will sell.
‘Upscale’ rehabs follow the same pricing principles
Some neighborhoods in every community will often be considered “upscale”. Homes in such neighborhoods will cost more, often regardless of architectural style or age. And there will be a commensurate difference in the demographic profile of those who choose to, and can afford to, live there.
In a word, homes in such neighborhoods will cost more and generally feature more costly amenities; designer kitchens and outsized baths come to mind. Developers and rehabbers must meet such heightened expectations if they are to succeed in these neighborhoods.
The “affordability” test is met very simply by the fact such ‘upscale’ neighborhoods attract households with higher incomes. To simplify the the math, if the household income is doubled (to, say, $120,000), then there is arguably twice as much available monthly for housing than in the $60 thousand example above.
It for this reason investors and rehabbers have the opportunity to engage or enter almost any market, working class or upscale, as long as they observe the fundamentals of “following the comp’s.” and observing affordability indices when it comes to pricing.
In this Urban Rehabber Round Table presentation, investor and rehabber Zack Herman describes just how he and his partners go about working successfully in Chicago’s “upscale” neighborhoods. (video 42m)