In a perfect investing world, you would have unlimited cash to sprinkle liberally over all your numerous property projects. Of course you don’t, so you’ll have to create a pecking order of the best opportunities to grow your investment dollars.
Absolute versus relative property values
Like any form of real estate, the more stable the neighborhood, the more stable the home values will be. It’s certainly easy enough to check with the local police precinct to pull local crime figures for a given geographic area. But if you’re concentrating on property investments in areas close to where you live, you already probably have a good idea which areas are safer, and therefore more stable in value than others.
Problem is, the safer and more desirable the area, the greater the absolute prices for homes will be fetching. So if, after determining that your cash available for investment (including financing options) falls short of being able to approach making a deal on a house in the best neighborhood in your area, then you’ll have to consider making offers on homes in the next best neighborhood. If you can’t afford that, you have to go on down to the next best neighborhood – and so on, to other less desirable areas.
Theory of relativity, the real estate version
As an example, if you can only afford a $200,000 property and your immediate area is surrounded by homes in the $500,000 range, you’ll have to look outwards to other neighborhoods that are probably not as nice as yours, where crime may be a major negative factor, as well as the overall look and feel of the neighborhood may also be less desirable. That doesn’t mean that a great deal can’t be made there – it simply means that you’ll have to evaluate your potential investment in a completely different light than if it were in the area of $500,000 homes.
The key problem when investing in less desirable neighborhoods, is that home appreciation relative to better neighborhoods is substantially reduced. So, that area of $500,000 homes may have a 4% appreciation rate, but the $200,000 area may be flat, at 0%, or worse, going down. Thus, not only is the absolute value of the more desirable neighborhood greater than the less desirable area, the relative value (of how much you can profit off of a home located in the better area) is also usually greater.
Degrees of difficulty
Ultimately, it will translate into a greater degree of difficulty when it comes time to place the property in the less desirable neighborhood on the market for sale. All things being equal, with both area homes renovated to appeal to the market for their respective areas, and both priced properly when first placed on the market, the home in the more affluent area should sell much faster than the one in the less desirable area.
However, if you have purchased at sufficiently below market value, and renovated within the style representative of the area, in relative terms, both of these house investments should create about the same return on investment (ROI) – provided you’ve crunched your numbers properly, and have set the proper asking price for each house.
photos courtesy of flickriver.com, jeffhallrealty.com, photographersgallery.com, nysdot.gov