Buying in the Right Location is Not THAT Important

Conventional wisdom says that the three things you need to succeed in real estate is “Location, location, location”.


Wrong. (are you shocked?)


Conventional wisdom will NOT make you rich and the conventional wisdom above is NO different.


Location is just one aspect of real estate investing. Here is a “tale of two cities” - I bought properties in two different cities which are polar opposites of each other and the results will shock you.


Good City
I live in Mason, Ohio - 40 minutes north of Cincinnati. It has one of the best schools not just in the state but also in the United States. As a result, Mason is a very desirable place to live. So investing in Mason should be a no-brainer, right?


That was what I was thinking when I acquired a 4 bedroom house in White Blossom subdivision - a premier subdivision in Mason. Houses close to the house I wanted to buy were sold for $350,000 to $380,000. Based on my estimates, it needed about $10,000 in repairs. I factored in $30,000 profit for my renovator and $10,000 profit for me as a wholesaler.

Using a Cost Factor of 0.9, my analysis showed my Maximum Allowable Offer is...


MAO = CF x ARV - Repairs - Profit

MAO = 0.9 x $350,000 - $10,000 - $40,000

MAO = $265,000


I offered $250,000 for the property even though they were asking $299,000. (The property is a foreclosed property or property owned by a bank.) The bank countered at $275,000. I increased my offer to $260,000. They lowered it to $265,000 - my MAO so I agreed. I was excited. “This is an awesome deal” I told myself.


BUT I couldn’t find a buyer - no matter how hard I tried. Moreover, I got feedback from prospective buyers that I offered too much. At first, I ignored it but when 3 of them said the same thing I started doubting my analysis.


BUT I told myself, “This is a good house in a great neighborhood. Location is superb...if I can’t find a wholesale buyer, I should be able to sell it retail.” SO I renovated the house. I got a partner to put up the downpayment and renovation cost. He was excited as well. He was so excited he decided to lead the renovation. He was very meticulous and renovating houses was what he wanted to do.


After renovating the house I worked hard in marketing it to sell it to retail buyers. Weeks turned into months. I even “auctioned” off the house doing a highest and best offer event but the highest price we got for the house was $270,000. After spending $265,000 to buy it and another $20,000 to renovate it (double my initial estimate), selling for $270,000 obviously wouldn’t work. I was also not counting the 5 months of holding costs (about $2,000 per month). Good thing though is that simultaneous to marketing it to sell, I also marketed the house to rent. We found a tenant who worked for Johnson and Johnson and his company guaranteed a rent of $2,800 a month. Before you think we were making $800 a month cashflow, think again - this rent includes paying for all the utilities (water, gas and electric) as well as bi-weekly house cleaning, lawn cutting and monthly cable TV service. We were really making breakeven cashflow by the time all expenses were deducted. Actually, the loan is being paid down every month and the property will appreciate over the long haul so we will recover the losses and will make money after several years.


BUT to be fair to my partner, I decided to have him make all the profit so I gave him my share of the property. I ate my losses and moved on.


What I thought to be a great deal because it was in a good location turned out to be a not so good deal after all.


What went wrong?


Before I answer that question...let me share with you what happened in the “Bad city”.



Bad City
Price Hill is a rental area and prices of houses have dropped like a rock. Houses that were being sold for $50,000 two years ago are now selling for $15,000! Every other house is in foreclosure (I’m not sure if this is a true statistic...it just feels like it) and it was not a good location before but the subprime collapse has made it even worse.


My team has acquired a house for $4,000 - it needed about $10,000 in repairs and one can rent the house for $700 a month. In less than 2 weeks, my Sales Manager sold the house for $8,000 to a cash buyer - a landlord. After deducting pro-rated taxes, we made $4,365 on it.


We made $4,365 on a house in a bad area where houses are virtually impossible to sell.



Is this luck? No...we did it again and again...and again. In fact, last week, while I was on vacation, my team made $3,500 on another house in a bad location. Buying houses in bad locations and selling them to landlords have become one of my most profitable investing strategy this year.


So is location not important? I did not say it’s not important...it’s just overrated.


What is Really Important in Real Estate Investing
Are you ready for this? Here is what I’ve learned in this “tale of 2 cities”....


You need to understand your market (and you should buy accordingly).


And there’s no global real estate market...not even a “national market”. All real estate markets are local. Even though I was buying in a good location (Mason - the Good City), I did not study the market as diligently as I should. Had I done that, I would have realized that there were several houses that lowered their asking price in the neighborhood - one was a bank owned property, another was owned by a seller whose husband died and still another was owned by a seller who needed to relocate to another state. They all lowered their asking prices such that the real market value of the house is closer to $320,000 not $350,000.



Also, higher priced houses do not sell as fast as bread-and-butter houses or houses in the median price range - which is about $150,000. I should have used a Cost Factor of 0.8 or 0.85.


Had I understood the market more, I could have used the following numbers:


MAO = 0.85 x $320,000 (value) - $10,000 (repairs) - $40,000 (profit)

MAO = $222,000


I lost about $5,000 of my own money in the deal... an expensive lesson for not understanding my market.


On the other hand, the bad city deal became a good one because with the help of my team - Garrett Stevenson and Paul Glenn, we understood the market in Price Hill and other “not so good areas” in Cincinnati. We have a ton of buyers for rental houses we can buy for under $10,000 that we can sell for under $20,000. We understood the market by talking with as many prospective buyers we can find (through our marketing) and understanding what they are looking for.


It really is that simple.


So learn from this “tale of 2 cities” my friends.


dedicated to your success,

Trace
P.S. I interviewed 2 of my students who just completed their first deals (in a student-only webinar where some of my students paid me $2,000 to get in my mentoring program). I got this webinar-interview transcribed and written as an eBook. If you are interested in getting Chapter 1 of this eBook for free, send me an email at moneyyoda@gmail.com