Reason #1: Location, Location, Location
These are the three most important words in real estate. They always have been and always will be. Location has a global perspective as well as a localized perspective that we will cover in detail in this report. But, first, a question: Did you ever see a nice house built right next door to a 24/7 gas station with a pizzeria? Who in their right mind would ever build a new house next to something like that? The first question I always ask myself when looking at prospective houses to buy is this: Who will buy this house from me for more than I am paying for it?
The first issue to be addressed when considering a property is who will you sell it to. You need to give yourself reasons why someone will buy that house in the future.
And know this: It is important what you buy too. You want to buy similar type houses available in a neighborhood or subdivision. No white elephants, please. Our main population centers in the early 20th century are a bit different than what they are today. The one thing that is certain is change and to be sure, locations that were once good may not be as good for a variety of reasons. We are no longer the leading Industrial nation that we were 100 years ago. Just ask the Chinese. Our Northeast Rust Belt areas are exactly that; Rust Belt. Out population trend is to the South for all the reasons contained herein.
Reason #2: State Income Taxes
This has become an increasingly important consideration in the USA because every state has to live within their budget and none of them are. California had a $28 Billion deficit this year with projected shortfalls of $20 Billion for the next five years. It’s obvious that they have to cut services and they will probably increase state income taxes. The point is that high state income taxes drive business out of the state. People forget that the more social programs you have, the more the state reallocates the wealth of its citizens. The wealthy and middle class subsidize the lower income segment of society. As states get “broker”, they cut services and raise taxes. Ultimately, it becomes an unfriendly place to do business and businesses move out.
When a large employer moves out of an area, it creates a domino effect to the local economy. Not only does it impact the employee that lost his job, but it impacts the corner store, the gas station, the dry cleaner and every other business where this laid off employee used to spend his money. It’s devastating when a large employer uproots and leaves an area. Suffice to say, avoid states that are losing employers and raising income tax. California will lighten their income tax burden by the tax they charge on marijuana. The other major issue that has ongoing long-term implications for California is the shortage of work. It is a great place to visit, but there are plenty of better states to invest in.
Reason #3: Real Estate Property Tax
Every state in the USA has real property taxes. Part of this money goes for school taxes and the remainder to local municipalities. However, there is a large disparity in property tax from state to state. Property tax is a fixed expense that never goes away on a property and impacts the cash flow that property will provide. I know people with free and clear houses on St. Petersburg Beach in Florida and their rent does not cover the taxes. Why would anyone buy a house where the property taxes eat up all the income? No one in their right mind would do that unless they thought they could sell the house for a large profit one day. I live in Tampa and I don’t buy cash flow houses in Florida because the cash flow is chewed up by taxes and insurance. A free and clear house in Florida that is not on the water might produce a 5% cash on cash return. Four years ago, I went to San Antonio to look at rental properties. Once we determined that the property taxes were 3% of the selling price, we bailed out in a hurry. $3000 on a $100,000 house in my opinion is excessive. That’s way too much if you want cash flow.
Reason # 4: Job Creation:
This is critical for the value of houses to increase because job creation creates a demand for houses. For values to increase, the demand for houses must be growing to absorb the supply. We no longer live in the REO world of foreclosed homes as the supply has mostly been absorbed by investors in trophy markets. In some parts of the country, the market may never recover because jobs are being lost instead of created. You want to buy houses in areas that businesses are moving to – not from. Follow the people who are following the jobs, and that, my friend, is the path of progress. That is where you want to invest your money in houses because the value of those properties will surely go up as supply gets reduced by the increased demand.
Reason #5: Transportation
It may not seem obvious to most readers, but major transportation systems are very important for property values to increase. If people can’t get there, then businesses won’t move there; and if businesses won’t move there, then you can forget about job creation and increased property values. There are many parts of this country where property values haven’t changed in 40 years. The roads need repair and it’s what you can’t see under ground that should cause concern; water and sewer systems. The properties have gotten older, the mechanical systems of the house and the municipalities are that much older and will ultimately need to be repaired or replaced. Look to areas that have major airports and a good infrastructure of roads throughout the area.
Reason #6: Climate
Seriously, is climate important? Just ask a senior citizen or even a middle aged person if they would prefer winter in Chicago or somewhere in the South. Hands down, the climate of an area will absolutely increase your quality of life. I know first hand, as I’ve observed my parents when they became snowbirds. A snowbird is someone who leaves the frigid North in the winter and heads south. My parents have enjoyed a much higher quality of life and, I think, have enhanced their life expectancy. The snow is a lot of fun for kids growing up, but as we age most of us would prefer the warm rays of the sun while playing golf or just taking a leisurely stroll.
Reason #7: Local Government
Every state is different and every municipality is different in each state. I like to invest where the government is pro-business, as they will, hopefully, engage in business friendly activities. Recently, I had two evictions in North Carolina and in both cases the judge ruled against me in a big way. It didn’t matter to the judge that the tenant’s didn’t pay the rent or in one case, the tenant forged a check and I had proof! My attorney was weak and the tenant’s attorney was excellent in both cases. I decided I didn’t want to own another house in North Carolina unless I could flip it fast. This is not the place for me to buy and hold properties and, candidly, I don’t like North Carolina property taxes either. Whenever there is a shortage of funds in cities, they try to create new fees and/or services. Special taxes on landlords, for example, the licensing of landlords, or forced property inspections by the city are some things you should avoid
Reason #8: Homeowner’s Insurance:
If you don’t think this is important, ask anyone who owns property in Florida. In fact, ask anyone who owns property along the Gulf of Mexico from Texas, Mississippi, Louisiana, Alabama, around the horn of Florida and right up the Atlantic Seaboard.
Avoid the water and avoid the path of hurricanes, unless you like giving your money to State Farm or any other insurance carrier. As a landlord in Florida, and several other states, I realized that cash flow is severely reduced by your fixed expenses of property taxes and homeowner’s insurance. It doesn’t make sense to buy in these areas for cash flow when America is on sale right now. My home in Florida just had insurance rate increased by $1300 – $3000 per year!
Before you create a strategy to acquire houses, do your due diligence on property taxes and homeowner’s insurance. I acquired some houses in Detroit, Michigan two years ago. I paid $17,000 for an old brick house in a decent neighborhood. My property taxes are $4,200 a year and the insurance is $1,000 a year. Folks, it is not a good plan to buy houses in these area and I would not do it again. Don’t get fooled by anything in Michigan. The area is dead and so will your investment dollars be if you buy up there. Sure, we’re fighting the tax assessment, but why would anyone buy up there when there are perfectly good areas in the country to acquire properties that are basically brand new.
Reason #9: Localized criteria:
Prior to acquiring property, we run several reports on the properties. These reports are as follows:
– Median income for the area
– Crime reports
– Education levels
– Percentage of homeowners versus tenants
All of this information is correlated and it’s easy to make a determination on a property. For example, if the median income of an area is low, it usually has a high crime index compared to the national average. Typically, these same areas will have low education levels and there are more tenants in the area than home owners.
We avoid houses in these areas and we advise you to do the same.
In many cases where there is low income, you will find rents subsidized by local governments with welfare or at the federal level through Section #8. Don’t ever be misled and think that because the government is paying your rent that it is guaranteed. The only guarantee you will have with the government in your business is that, at some point, you will get aggravated and frustrated. I know this from personal experience as I have had as many as 143 tenants on Section #8 at one time. What a headache – and I would highly recommend that you never rent to anyone that has their rent subsidized in any way. They won’t buy the house and there goes a perfectly good exit plan. If they don’t have the money to pay the full rent, then if they break anything they can’t afford to fix it.
Please don’t get me wrong. I have nothing against low-income people in any way whatsoever. My intent is to strictly make money. That means buying quality houses in desirable neighborhoods in the path of progress and renting to tenants that want to own the property.
To read more about the path of progress, go to www.BuyCashFlowProperties.com and download Buy Right Retire Rich, which is my free book. This easy to read book with animations will open your eyes on where to buy properties.
If you’re ready to buy hassle-free, “turnkey” houses in the path of progress or if you have any questions or comments call me direct at 813-435-1551 Ext. 1010 or email me at RJP@BuyCashFlowProperties.com