Buying Rentals? Here’s How to Find the Perfect Neighborhood

Whether you're a seasoned real estate investor or just getting started, picking a market to invest is only the first step to actually buying a property. What can be even more important and a place I've seen a lot of investors go off course is narrowing down the areas within your chosen city or town that are absolutely optimal for your investing goals. Hi, I'm Chris Clothier with REI Nation. I've been investing for over 20 years and I'm going to break down how to identify the best of those secondary markets for any investing goal and just as importantly, how to avoid the mistakes that are common and I've made them all. What is a secondary market within a greater city or area? We get asked a lot of, hey, I want to invest in, and I'll use Memphis because that's where I'm most familiar. I want to invest in Memphis, but Memphis, man, Memphis is a huge city and there are lots of little sub markets within Memphis itself. And it depends on what you're looking for as an investor as to where's the right place to go? What's the right part of the market to invest in? And for me, I use some very simple, simple rules today that I developed over time to pick a right sub market for me. So a secondary market would be, I only want to invest in homes that are within, let's say 5% of the median priced home, or I only want to invest in properties that are in the top 25% of the median value for an area. So I might be looking for a very particular type of return. I might be only interested in investing really for appreciation or the highest opportunity for resale down the line. How can I break this down? Sometimes it's by zip code. Oftentimes it's by zip code and then down to actual neighborhood. It's cross streets that can be really, really important that you look at. So when you're looking at a market, Memphis is not a good idea to just say, I want to invest in Memphis. It's why do you want to invest there? And so what part of the city is best for what your goals are? Some of the best ways to find out about a market right there inside the BiggerPockets forums, you can find investors that are in just about every city across the country that makes sense for investing. And then within those cities, you can find investors that invest differently. And the thing to do is ask. The advice I've given investors over and over and over again is invite others out for coffee, invite them out to have a beer, have lunch, have breakfast, whatever it is. But let me provide a little value for you. Let me buy you coffee. Let me buy you lunch. Let me buy you dinner. And in return, can I pick your brain and you tell me how you pick neighborhoods that you like, how you got started, what are some of the mistakes you've made? How can I really dig into the insight? And sometimes that has to be done over the phone because you don't have investors near you that are investing where you want to invest in. And that's OK, too. You always want to find investors that are doing what you want to do. If you're looking to invest strictly for appreciation, it's probably not best to spend a lot of time with an investor that says, look, I'm I'm 100 percent hands on. I am all in for the maximum amount of revenue and the least amount of expense. I want to try and juice my cash flow as much as possible by handling most of the work myself. That's not somebody, especially if you want to be passive, that's going to help you. So pay attention to the investors that are accomplishing what you want to accomplish. And specifically in those secondary markets, you know, you're looking for somebody that does precisely what you do. I pick my markets today on appreciation, not on cash flow, especially not the kind of the convoluted way that cash flow is looked at today. When I first got started, the common mistake I made that I tell investors to avoid today is don't use like loss aversion as an excuse to buy a house. So when I first got started, I bought really, really inexpensive junkers that none of the local investors wanted to buy. I was buying, you know, away from home. No local investors, they weren't buying these houses. So that should have been my number one key that maybe I shouldn't be buying them either as an out-of-state investor. But I did. And my rationale was if I spend less on the home and it fails, then I'll lose less money. The fallacy in that was by buying in the lowest priced homes in what I thought was the least amount of risk, I was actually doing the riskiest thing I could do as an investor. I was almost guaranteeing that I would lose my investment. And I almost lost all of my investment on my portfolio early, early on. So I was buying in the cheapest, least expensive homes I could find. And even if they said they had been worked, even if they said they were turnkey, it didn't matter to me. I just wanted them to be cheap. What I didn't understand and equate was my reasoning was I wanted to lose the least amount of money. And what I was doing was guaranteeing that I would lose whatever it was. What I pivoted to and learned was when I'm looking for sub markets, and it doesn't matter where I'm at in Texas, in Alabama, in Tennessee, wherever I go, I'm looking to buy the best asset I can first. I want the lowest probability of losing my money. So whatever I put into a price, I look for a sub market that has high demand, both on rental and resale. I look for areas that are not heavy rental. I look for heavy owner arc areas where I can get a rental. I'm completely passive. So I look for great companies that are already in existence that can handle the management or any type of work that needs to be done for me. That's how I pick a secondary market today. There's an existing business plan already happening that I can plug into. I can buy a home that has high demand rent, high demand resale. Another question that I know it has to be on everybody's mind and it should be. We think about investing. I invest for generational wealth. This is for my kids down the line. All of my properties will eventually go to them. But here's the thing to remember. These properties that I own today may not be the properties that my kids get. When I buy a house, I'm only thinking of five to seven years. That's it. And especially if I'm in an appreciating market or I'm in a market where I expect the bulk of my return to be achieved when I sell. So two things are happening simultaneously. I have a renter who is paying all of my note off and they're also providing all of the revenue I need to cover all my expenses. So I don't care if I'm making cash flow each month because I'm not spending it. All of it goes back to the house. That's my number one concern. I want them to pay for it all. But there will come a time between year five and seven, maybe between year seven and ten, but definitely there that I need to review. And if I feel like I've had a great return, but I'm starting to see some expenses come up, I will 1031 exchange out of that property right back into what may be the next most optimal sub market to achieve what I want to achieve. And it might be the same neighborhood. It might be a different neighborhood. But the bottom line is we should not think as investors that when I buy 123 Main Street that 30 years from now, I own 123 Main Street. There's nothing wrong with that. You can, but over time you will add to your cost basis. So if you bought something for a hundred thousand and in 30 years later, you put an additional $30,000 in really major upgrades into the home, which is likely to happen as you continue to re renovate and keep up with, you know, normal wear and tear plus CapEx, plus just keeping up with the neighborhood. If it's gone up in value the whole time, fantastic. Congratulations. Great job. But most of us, me, especially I will sell along the way. I will sell in 1031 exchange into newer assets or different assets or different area based on the goal I have, which is always appreciation. I will tell you right now that some of the other common mistakes I see is that don't go out and create an LLC before you bought any properties. The things that we need to think about as investors are not like asset protection and, you know, hiding our assets. So we won't get sued. That's the last thing. To me, we need to be thinking about as investors. We need to be making good, smart decisions on where we're going. The number one, most important thing, if you are a passive investor is who you're going to do business with. So visiting a neighborhood and visiting a house isn't important. Of course it is. And you should, you should go where you're going to be investing, but seeing the actual property, I would say is less important than meeting the actual team that you are going to be hiring to ensure your success. If you go and you're not comfortable in a neighborhood, don't invest there. If you go and you're comfortable, but you don't know who the team's going to be. It may be as bad as investing in a bad neighborhood. You know, really who you hire is really important. Visiting the neighborhood. Yes. Visit who you're going to work with. More important. And those are some of the, some of the big mistakes I see people make. I think the most important thing you can do if you're looking to pick a great secondary market is understand why you're buying, what result you're looking for and who you're going to do business with. Those two decisions will guide you to the right part of town. Especially if you then ask other investors who have been investing there. Maybe you meet them on BP. Maybe you meet them at, at local real estate investors clubs, but meet them. Hey, is, is you've achieved what I want to achieve. What tips and tricks can you share with me here for a $5 cup of coffee? Thank you so much for listening. I hope this has been helpful for your own investing journey. If you have more questions, feel free to leave us a comment in the chat or connect with me at biggerpockets.com. Again, Chris Clothier with REI Nation. Thanks for joining me.