Investing in the Right Market
By Ken McElroy
May 11, 2006
Independent Rental Owners who successfully gauge
growth indicators can help mitigate investment risk.
There certainly are many ways to invest money; however, as independent rental owners know, real estate has significant advantages over most other types of investments. What other investments provide a monthly cash flow? Let’s be honest, cash flow should be the reason to invest in the first place. With real estate, investors can control their cash flow—provided they follow some basic rules.
While almost every independent rental owner’s personal goal is to become financially free and not be dependent on anyone or anything, few rarely achieve this financial freedom. Most serious independent rental owners achieve financial freedom if they have a solid plan and follow it. Without a solid plan—or goals—it is impossible to track progress.
Part of that strategy involves investing in the right market. It is imperative that the decision of where to invest be based on sound research.
Keeping an Eye on Cash Flow
Cash flow is influenced by many factors, including price, interest rates, employment, population and property management. Probably the most important factor is selecting the right property in the right market.
The market is more important than the property itself. It is better to own an older, smaller property in a hot market than a beautiful, new property in an area that is struggling or is dependent on one major employer.
An investor’s goal is always cash flow, and if the investor can achieve higher occupancy in a high-demand area, this will be a better investment and provide more passive income with much less time and effort. Investors may end up paying more for this location, but in the long run, they will be much happier with their investments.
Two of the hottest markets in the Western United States are Las Vegas and Portland, Ore. There, my company has substantial real estate investments, and we spend a limited amount of time overseeing these investments because these local economies are booming; both employment and population are expanding at a rapid rate.
The booming economy is keeping properties in these areas fully occupied, which in turn minimizes marketing expenses and eliminates concessions to new renters—both of which create more cash flow.
Success in these markets was strategic: Investment was made in these markets when each local economy was depressed. Research showed these two markets figured to grow due to indicators such as building permits, which are one strong indicator of population and employment.
Hitting It Big With Casinos
Every market is unique and needs to be fully evaluated before an investor takes the plunge and invests.
Indicators for each economy vary from city to city. For example, New York City is bidding for the Olympics in 2012. Should New York receive the bid, there is no question that there will be a large surge in the Long Island economy and redevelopment along the riverfront where the Olympic Village is planned.
In Las Vegas, one major contributing factor was the massive new casino construction that was being planned. Steve Wynn is opening the Wynn Casino in the next several months and is hiring 16,000 employees over that time. The majority of these employees will be from out of state and will need housing.
In Arizona, the recent completion of the Glendale Arena, which will host major sporting events and major concerts, provided a real economic boost to its local area. Real estate investors who watched these indicators are now reaping the rewards with increased values and high occupancies as this area continues to redevelop.
Those who own property in a market that is trending negatively should take a serious look at how much longer that property should be held. Consider if this down cycle will affect cash flow.
Markets will always come in and out of favor and are traditionally cyclical in nature. Investors should not be too alarmed at short-term corrections in the economy and should keep focused on cash flow and long-term goals that have been determined through strategic thinking.
Understanding the local market before investing is paramount. If investors keep their eye on the cash flow or potential cash flow by looking at the facts, both for the property itself and the local market, they can help mitigate investment risk.
This is the first in a collection of articles from owner/author Ken McElroy, who wrote “The ABC's of Real Estate Investing,” which was released in September 2004 and became No. 1 on the BusinessWeek best seller list in December 2004. McElroy covers the topic of goals in more detail in chapter two of his book.
See the second article in this series: “Manage and Learn”.
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