One question some people have is where should I look? Should I look in the wealthy areas, the middle class areas, the poor areas or the hood? To some extent any of them will work, they just take somewhat different strategies and temperaments.
Investing in Really Bad Areas
If you want to invest in the hood, the really bad areas, are you comfortable going to those areas? What about at night? Yes, you can get properties for very little money, but it might be a bit more difficult to get financing than in somewhat better areas.
In addition, how much of a hard ass are you about being a landlord. If you are a soft touch, you are going to get abused financially as a landlord, especially in these areas. If you aren’t really tough and experienced as a landlord, or have someone who can do property management for you, avoid these areas.
There will be little appreciation in value, in fact, possibly depreciation depending on what is happening in the area. Also, if you want to sell, you will probably only be able to sell to another landlord who is also going to be looking for a deal.
Investing in Expensive Areas
If you want to go for the really expensive areas, you will probably be looking for foreclosures. You would then do any repairs necessary and sell it. This is called flipping or wholesaling. Flipping is legal, but got a bad name because a lot of people committed fraud while doing it. Fraud is obviously not legal. It would be tough to buy a place in this price range and rent it out and make it cash flow. Also, if you make a mistake or miscalculation it is going to cost you a lot more money on one of these properties.
Most investors go for the last two categories. If you are new to investing, this is where you should be looking.
Investing in Middle Class Homes
Middle Class “cookie cutter” homes is an area many people like. These are good for either fixing up and selling or for renting. Both depend on getting the right price as with any real estate transaction.
John Schaub, a very wise investor and a nationwide speaker on real estate only invested in these types of areas. He looked for properties he could rent. He figured the tenants would pay off the mortgage and then he had a great long term income stream.
In these areas you have a greater chance of appreciation than in poorer areas and they will weather any market downturns better than poorer areas. The other thing is that if you are looking to sell, you have a much larger pool of buyers. For expensive homes, the pool of buyers is small and for poor neighborhoods and especially the hood you also have few buyers except for landlords who are also looking for a deal.
Investing in Poor Areas
So the downsides of the poor areas were kind of covered above. They are likely to have less appreciation and there are fewer homeowners to buy the property. It can be a good area to build up rentals for income but the people tend to be harder on houses and do more damage than in more middle class areas. You will also probably be a bit more challenged landlording in these areas. However, the prices are cheaper so you can potentially get more property.
If you are savvy and know what the trends are, you can do very well by investing in a poor area that is being gentrified and moving to middle class. That way you get the best of both.
Hope that helps.