Several years ago I was working on a rehab project in a good, working class neighborhood. I put one of my “We Buy Houses” signs out in front of the property during construction. A few days into the project I got a call from a seller that I’d left an offer with during the previous month.
In our initial meeting, he was unsure about moving forward with the sale. He didn’t know me or my company. His initial contact came from one of my postcards. Before that mailing he’d never heard of my company before. It so happened that he lived near the project I was working on. He’d driven by the house and saw my sign.
Apparently that’s all it took. He was no longer the guinea pig testing out someone new. A simple yard sign convinced him to sell me his property.
That phone call was eye opening. My seller felt comfortable because he saw one of his neighbors working with me.
I thought, “I don’t have the money to be everywhere, all the time. But I can saturate small areas and be the local house buyer in those small markets.” That’s what I did.
Target Markets are Where It’s At
There is a lot of benefit to focusing on smaller geographic areas. The practice allows you to control your marketing costs, project a bigger presence and select the type of properties that you want to buy. Targeting smaller markets also allow you to become an expert in that geographic location.
The first step in creating your target market is evaluating your goals. What do you want to achieve? What’s the reason you are even messing with Real Estate investing? I’ve written another article on goal setting that you can read through (if you’ve not already read the blog post) by clicking here.
Once you’ve determined the “why” for your real estate investment, the next step is to determine the “where.”
Your target market will be dependent on your goal. If you want rentals, you’ll target one market. It you want flips, the target will be another area. The idea is to work backwards from the intended outcome to structure a step-by-step action plan to reach that end.
Below I’ve listed some investment strategies with a description of the neighborhoods paired with these strategies. Use the list to evaluate your particular market and define your geographic area of focus.
Buy and Hold for Appreciation: Consistent, Slow and Steady Gains
Investors looking for a retirement vehicle would want to look for properties in this category. These are the “bread and butter” properties. They’ll be located in working class neighborhoods that contain renters and property owners. Returns will be marginal on these rental properties and acquiring deals at huge discounts are the exception rather than the rule. Property values are fairly consistent over time with below market gains during the boom times and minimal losses during a crash. Tenants renting in these areas generally present fewer problems and are more responsible.
Buy and Hold for Cash Flow: Rough Areas with Great Return on Investment
Investors who want monthly cash flow should at least consider this investment option. If you’re interested in a great cash-on-cash return on investment, this market is for you. The downside is that these houses will likely never appreciate or be worth anything except the cash flow they provide. These neighborhoods are usually 100% tenant occupied. They’re typically located in higher crime areas. Tenants are less responsible and the investment is much more hands-on than the “Buy and Hold for Appreciation” approach. On a positive note, this category of property is almost exclusively purchased by other investors. They can bought for a few thousand dollars and yield several hundred dollars per month in rental income.
Fix and Flip 1-5 Properties Per Year: Larger Profits. Lower Volume.
Investors with cash, credit and access to deals should look closely at this area of investing. These neighborhoods are nearly 100% owner occupied properties. Their price point is at the upper end of the market, and good deals are difficult to find. This is the white collar neighborhood that everyone would love to live in, if they could just afford it. When deals come along in these areas, grab them. Profits can range from $50,000 to several hundred thousand dollars.
Fix and Flip +6 Properties Per Year: Small Profits. Higher Volume.
Investors who want a consistent flow of fix and flip deals should target these areas. They are the “bread and butter” properties in the higher end blue collar neighborhoods. Most, but not all, of the residents are owners. Many of the area attributes will be similar to those for “Buy and Hold for Appreciation” areas. The exception will be the property values. They’ll be high enough to make rental properties unprofitable, but low enough that most people working in an office can afford them. Profit margins in these areas will range from $25,000 to $50,000 per deal.
Pinpointing a target market is crucial to successful Real Estate investing. It saves marketing dollars. It saves time. Its the next step to reaching your goals. It’s a beautiful thing.