It is funny to note that Geography was a subject that I dislike the most but now it has become one of the most important aspects in my life.
A key in real estate investing is to buy at the right location.
Some towns are almost “universal” which means the entire area is decent. In such towns, investing is mostly about understanding the condition of the house and general market cycle.
And there are towns that have very diversified neighborhood. You can cross a street and will be in a completely different world. I still remember when I was in school; our school main entrance was on 116th Street, which was a decent area. As soon as I got out from the north side of the campus, I could sense a slightly uneasy vibe. Walking even further, crossing 125th Street, the neighborhood was entirely different. Many of my fellow classmates suggested not walking beyond there. All these places were within a 5-minute walking distance! Needless to say, in these areas, aside from the house condition and market cycle, the location of the property affects the prices greatly.
It is very unusual to find a town that is completely uniform. Chances are that the area you choose to invest will have some degrees of good and bad neighborhoods. Because of this, most of us will find this article useful.
Why is it relevant?
Okay, we know some good areas and bad areas can be next to each other. Why does it matter?
This matters because knowing that gives you an opportunity to buy undervalued properties. One great way of making money in buying real estate, in neighborhoods where good areas and bad areas are next to each other, is to buy in good areas that the seller perceives as bad . You want to buy a property on a “good side” at a “bad side” price. Information Asymmetry is at play: You look to buy in an area, where you know it is a good area while the seller doesn’t.
Imagine you are buying on the good side at a bad side price, ie. buy at $100k in a $180k area. You just made $80k profit off that. Even if you pay slightly higher for that, say $120k, you will still have a significant profit ($60k).
Usually you don't find such deals from a local homeowner. That’s because the owner lives there day-in and day-out and he or she will likely know more about the area than you do. Usually, such deals are found via these sellers:
1) Out-of-state sellers (especially if they get the house involuntarily e.g. inheritance)
2) Investment firms (they may have bought that property “by mistake” as part of a larger deal)
3) Banks (from their bank-owned inventory).
Now we understand WHY we are doing it. The next step is HOW we do it.
How to Understand Your Investment Area?
Case in point, when I started in 2012 looking at the Jersey City market, I knew very little of the city. I was living in New York but had almost never taken the Path Train (it’s the train that connects New York and Jersey City). By now, I understand Jersey City very well, down to almost the street level. Everyone has to start somewhere right?
So how do I do that? I am going to show you how I start with knowing little about the Jersey City to becoming a local expert in the same city. There is hard work involved but you can do the same analysis for the town that you are interested in.
Step 1: Initial Screen – Online
You may want to begin your analysis online because you can cover a large area with very little time. The benefit of doing analysis online is that there is no travel time required. For example, you may have to drive from one end of the city to the other in an hour or so. On a computer? Just a couple mouse clicks!
There are various real estate websites that capture property sold data and listing information. Public websites that I use regularly include: Zillow.com and Trulia.com.
Meanwhile, there are also websites that have more up-to-date and comprehensive data, but they are usually restricted to real estate agents only. For initial screening, I find Zillow and Trulia are sufficient.
As you do your analysis online, you want to look for the following:
P.S. We’re using Jersey City, NJ as an example. The analysis was done in September 2014 and will change in the future. The process will still be the same.
Price: The more expensive it is, the better the neighborhood it is. Considering from a zoom-out view, it should give you a good picture in terms of how the house prices are distributed. Sometimes you may find a small area (we are talking about only a few blocks) where the prices are different from its immediate surroundings. We call them “pocket areas”. Make a note to yourself for those areas. Those can be lucrative opportunities for you as a buyer.
Of course, you will want to compare apples with apples. Compare condos versus condos. Compare a 2-family house to a 2-family house etc.
In Jersey City, waterfront area and downtown area are by far the most expensive. The condos in those areas are 10 times more expensive than in other regions. ($600,000 vs $60,000 1-bedroom). Roughly speaking, Jersey City price, in decreasing order is:
1-East Side (Waterfront / Downtown) = HIGHEST PRICE
2-Upper Middle (Journal Square)
4-Middle and South Side = LOWEST PRICE
If you look at price map in more details, you will be able to identify some pocket areas as well. For example, one of them is near Gifford Street on the West Side. Near a large park, the locals call this area “The Doctors’ Row”. Of course you won’t know it unless you spoke with some locals. However, if you look at the price map observantly, you would still be able to spot out the difference in pricing, prompting you to investigate further.
Pictures: For the For Sale / Sold properties, Zillow and Trulia allow you to click on each house and look into the details. Inside that page, you will see the property description and its interior photos.
Here are the things that I look for. If there is a moment to be superficial, now it is the time =). I look at the quality of the photos. Are they professionally taken, or they seem to be out-of-focus, messily-taken photos done with an outdated camera? I then look at the type of finish the house uses. Cheap Industrial grade vinyl tiles, or nice hard wood floors, or plush carpets? What about cabinets: standard builder’s grade oak, grainy cabinets or really nice ones?
Typically, in highly priced areas, you will see granite countertops, designer-looking cabinets, recessed lightings, and professional quality photos. Whereas in lower priced areas, you will see the really basic finishes. If a house is for sale but you see no photos and little information in the property description section, you can assume the house has mediocre finishing at best. Think about it: if you are selling a newly renovated house, wouldn’t you want to show as many pictures as possible and brag about it?
Of course, there would be exceptions, such as 1) owner-occupied, over-renovated houses in low price areas, or 2) old, neglected, under-renovated houses in high price areas. Our main focus is to figure out the pattern. Which part of the town do you generally see good type of building quality (reflecting a good neighborhood)? Which part of the town do you see not-so-good type of building quality (reflecting a so-so neighborhood)?
Step #1.5: More Online Screen – Google Maps and Bing Maps
I call it Step 1.5 because it is somewhat optional. Remember we are using Zillow or Trulia to look for sample prices and listings. What if by chance you happen to pick an odd listing such as an over-renovated house, or an oversized lot that you are unaware of? That might throw off your analysis.
To be safe, you might want to check to make sure the house(s) that you pick conforms to their neighbors. Say you use 123 MAIN ST as your representative listing. You might want to go to Google Maps or Bing Maps to see if the neighborhood houses (e.g. 121 MAIN ST, 125 MAIN ST) look similar. Both Maps have a “street view” which allows you to make a virtual tour as if you are walking along the street. “Walk” around it to make sure the house you pick does not stick out (neither in a good/bad way).
Step 2: Learn from Realtors and Real Estate Investors
By now, you have a general understanding of the area. Now it’s time to go to the next level. Remember, the more you know about your area, the more likely you will notice a great deal quickly whenever you come across one. Luck tends to favor the well-prepared ones.
You want to go beyond just a general understanding of your area. You will want to learn your area in more details.
1) Which streets are particularly good / bad
2) What the dividing lines between good and bad neighborhoods are
3) Where the pocket areas are
4) Where, if any, the new developments are etc.
Realtors and Real Estate Investors are your great sources of such information.
You may wonder if Realtors and Real Estate Investors are such valuable resources, why don’t we start from there. Why do we have to do it in Step 2 instead of Step 1?
There is a reason why you want to do your own homework first.
Let’s think about it. Imagine you, as a seasoned real estate investor, were talking to me. In the conversation you talk about several street names, but I don’t know anything of them. Wouldn’t the conversation sound awkward?
Now imagine a totally different scenario. When you talk about the street names, I say “Yeah, this so-and-so street, I remember this. It’s on the east side of the town right? Recently there is a 2-family house near that street sold 6 months ago.” How much more engaging the conversation is going to be?
People like to talk to the people they like. The key of a conversation is to make the other side feel good and excited when talking to you. From my experience, people like to talk to others who sound confident and comfortable during the conversation. The best way to do is knowing what you are talking about. If you do your homework earlier, even though you may not know the town inside out at this stage, at least you know SOMETHING about the town. I find the conversation is a smoother and more educational if I know something about the topic.
Once you are able to build rapport with others during your conversation, you will find a lot of them are willing to share their knowledge, even some insider tips.
Another reason why you want to do your own research first is because over time you will meet a lot of Realtors and Real Estate Investors, both the professional ones and the wannabes. You would have saved yourself a lot of time if you can separate the real ones from the pretenders. How do you screen them? Again, the knowledge that you got during your research will give you some indication how real the person is. Real ones will definitely know the basics of your area (and more).
Lastly, don’t be intimated to ask them straight up. Ask if they know much about your area and how many recent deals, which they have done in the area, that interest you. Only the fake ones need to dodge. The serious ones don’t mind to share / brag about the deals that they have done.
Through talking to various investors and realtors, you will grasp a good background of your area. Now is the time to verify, which brings up to our next step.
Step 3: Actual Sightseeing and Greeting Locals
Nothing is better than on-site sightseeing. At the end of the day, your body sensors are the best indicators to feel the vibe of a neighborhood. After you have gathered the intel from realtors and investors, now is the time to verify.
Whichever way you want to check out the area is entirely up to you. It is equally fine whether you want to dedicate a whole day walking around the area, or you choose to walk through the area by bits and pieces over a period of time. At the end, you will want to verify the following:
1) The dividing lines of “Good / Bad” Area: If your source has told you where the dividing line is. Walk around the area from BOTH sides. Observe the pedestrians, various houses, storefronts etc. and see if there are any differences.
For example, in Jersey City, I was told, and am able to verify a major dividing line lies in the John F Kennedy (JFK) Boulevard. West of JFK (good side) has more well-maintained stores and a more tranquil feel than the east side has (bad side).
2) Specific Good / Bad Streets: - [GOOD] Williams Stegman Parkway, [GOOD] Broadman Parkway, [BAD] Lexington
Couple of tips:
Make it Fun
Walking around neighborhoods may seem boring. Especially if houses are somewhat similar all around, it can get old after a while. I suggest you come up with some fun ideas to motivate you to walk the area. For me, I like to bike a lot, so I will purposely pick different routes to go around Jersey City. One, it makes my bike journey more exciting. Two, I get to know more and more about the streets in Jersey City every time I bike.
Maybe it is a restaurant that you want to try in that area. Maybe there is an amusement park nearby to bring your kids there afterwards. This is CRUCIAL. After all, if it does not motivate you now to walk the neighborhood, would you be motivated enough to go there after you buy a property?
Speak with Neighbors
Another tip: While on-site, I always look for opportunities to speak with the neighbors. They are the ones who understand the surrounding the most. They have the wealth of knowledge that you cannot find it elsewhere.
One day, I walked through an up-and-coming and one of the most sought after blocks in Jersey City. To my amazement, one resident told me there were five houses for sale. It turned out a few of them were unadvertised deals that were not available publicly (not even on our Multiple Listing Service, the realtors’ database). Had the lady not told me, I would have never known the five gems that existed on the block.
Open up yourself. Ask questions, and you will be rewarded.
If you go through this exercise step-by-step, you will become an expert in your area. Don’t stop here though. Always be humble to your knowledge. Neighborhoods do change from time to time. The dividing lines can move. Areas can deteriorate or appreciate. Old pockets areas can be replaced by new ones. The good thing is: as long as you keep a pulse to your market and keep your observant eyes open, you will be just fine.
As a final example, this is the map that I come up with for Jersey City for your reference.
I hope this gives you enough information to tackle your area. Understanding your area is a key to your successful investing career.
Good luck investing and check out more articles that put more money into your pocket.