What is the Sweet Spot in Real Estate Investing?
Wholesaling, Fix and Flip, and Buy and Hold. These are the 3 main strategies in real estate investing and the success for the real estate investor in any or all of these strategies is tied to a simple concept: finding “the sweet spot” that takes in consideration geographical location, type of property and price range.
Any decision I make as far as which properties to purchase for either wholesaling, fix and flip or buy and hold is tied to a specific formula that I have developed over the years and I am going to share it with you, as to help you avoiding making costly mistakes as an investor.
Supply and demand. I don’t look necessarily for the best neighborhoods (which are usually overpriced,) or school district. If wholesaling or fix and flip, my question is, “Where do investors buy for rehabbing or renting out properties?” If I wholesale, I want to find inventory that rehabbers want to buy to fix up or landlords who want to buy as rentals. If I am going to fix and flip myself, I want to buy properties that I know are a sure bet for selling fast.
This research is crucial before you start looking for properties and you can perform this research using the MLS or one of the tools out there like PropStream.
What properties’ price range do sell the fastest in a given location (DOM – Days on the Market?)
Even if you are not going to fix up the properties yourself (as a wholesaler,) you do need to take in consideration what rehabbers want now, because most of them do want to turn these properties over very fast.
For any given area, there is a “sweet spot”/price range as far as ARV (Actual Retail Value,) at which properties do seem to sell faster. Usually that is not the lowest price or highest price for the area, but the medium price, whereas most people seem to be able to get a loan (FHA or Conventional.)
Same thing for rentals. What is the rental demand for the area? What is the most common rental rate for the location? Landlord will buy only properties that they can cash flow with. CAP rate (Capitalization Rate) and GRM (Gross Rent Multiplier) are common tools to find out the profitability and viability of a rental.
The price range research can also be done via the MLS (Sold Properties,) or Propstream.
Risk versus Stability
Predictability is one of the main reasons that makes finding the “sweet spot” in real estate investing a very smart move for real estate investors.
Keep in mind that higher priced homes are statistically more likely to experience drastic fluctuations in value. Homes in the higher price range are more susceptible to local area and overall market depreciation.
By finding the “sweet spot” in your area, the chances of getting into a high-dollar deal only to lose equity in the property before you have the time to flip or not being able to wholesale it are very minimal.