The symbolism is easy to understand. When it comes to a local economy, when something noteworthy occurs it is like a pebble in a still pond. The ripples flow out from the center of activity and keep going until they reach a certain distance, slowing and getting smaller along the way. In this system, we track certain economic stimulants and then watch
how they ripple out from their center.
Employment
Employment is market stimulant numero uno. A company from Sothern California moves it manufacturing division to Small Town, Ohio, it hires people. People need a place to live. People do not like to travel too far to get to work. Thus, when a new, large employer comes to an area, a ripple goes out into the marketplace. Homes that may have lain vacant for years are now desirable because people now have a reason to live near the center of employment. These may have been bad neighborhoods; they may have been any kind of a thousand kinds of neighborhoods. But that neighborhood is about to change. Take a place like New York City. Historically, certain neighborhoods were settling points for one immigrant group, then another, and then another. The neighborhood got built up; it got run down. Then something occurred and it went up again or down again. It became chic, it became passé. Cycle, cycle, cycle. But nothing affects a cycle like employment.
Comparing real estate to the stock market, population is to real estate as volume is to stocks. You need population to have a growth market. You don’t have population without employment; simple as that. In other words, stock brokers say, “Buy on volume, not on shares,” meaning, what does it matter if a stock price jumped $100 if only one guy bought it? But if a million people bought it to drive that price per share up, you’ve got a boom.
Entertainment
Mountains, ski resorts, lakes, oceans. People always discount these things as “location.” But it’s not location; it’s what it brings as value to the person living near them, which is entertainment. This after Employment is the second largest impact stimulant. Entertainment also includes Downtown areas, new shopping, new sports stadiums, new multiplex theatres. But what makes a place a “place” is entertainment. You know that old put-down, “There’s no there there”? This is what they meant. Outside of employment, people need a reason to be someplace. The location has to have some positive amenities.
Redevelopment
Recessed areas frequently have new or redevelopment a new shopping mall coming along, a new housing development, a new office park. Should that be a signal for you to buy, buy, buy?
What it signals is that big developers have identified large pieces of undervalued land. It could be vacant (traditional development) or it could be occupied but ready for demolition or retrofitting (redevelopment). Either way, it means something is about to happen…in about five years. See, these guys got to be big corporations by being smart. They’ve already scoped out new employers about to move into an area. It’s like insider trading. They know a new hospital is coming before ninety-nine percent of the locals know about it. These guys are all in the building trades. Word spreads like wildfire. But these guys must first get land cheaply. When it’s that cheap, it’s still too early for you to get into the market. But keep your eyes peeled. Something good is about to happen.
Transportation
New toll routes, new Interstates, new expansion of highways. Utah a few years ago expanded route Fifteen from Salt Lake City to Las Vegas, making it four-lane in each direction. The real estate values in that whole corridor went up twenty percent the following year while the rest of the country dropped. Why? Because now all that land is accessible, and people in over-valued Vegas are rolling on up the highway to nicer, cheaper living. If New York City were to add another bridge and dropped it smack dab into the most rundown, crappy part of North Jersey, the same thing would happen. That area would bloom.
The most important thing to look at is accessibility of an area. Is it easily reachable by major highway? What about mass transportation, such as bus lines, trains, or light rail? Even check out taxi companies are there any, and are they of decent size and doing a decent volume of business? What about airports? Are there any around and are they fairly easy to get to?
Lastly, look for transportation changes. This doesn’t happen often, but when it does, it has a massive ripple effect. A major state highway expansion doesn’t happen in a vacuum, it happens for a reason. Find out the reason and then find out the details. See what areas will be most positively affected. Then, don’t be afraid to figure out what, if any, areas will be adversely affected. A new highway expansion could totally decimate properties near a previously well-used local road, yet make other properties rise from the dead. Also, look at all of the affected areas. Maybe that new highway was meant to get people from point A to point Z, but in doing so, it will positively affect all the areas from point B through point Y. See, ripples.
Education
Fantastic rental opportunities exist where there are centers of higher learning, such as colleges. College students need off-campus housing. They prefer it to be nearby campus and they prefer it to be reasonably priced. Also, since new colleges don’t just spring up everyday, look for college expansion. It’s not unusual for a college to grow, adding five hundred more students than they’d previously been able to accommodate.
When that happens, you’ve got five hundred new potential rental customers. Of course, there’s a downside to this. Oftentimes a college’s expansion is new dormitories. When that occurs, take caution. See how it affects the percentage of students living on-campus versus off-campus. This data is readily available on college Websites. If an ever-increasing percentage of students are beginning to live on campus in new dorms, that’s a negative indicator and a signal for you to get out of that geographic market.
Centers of education also mean an influx of new members of the local workforce. The college itself hires lots and lots of people. Some professors are “just passing through,” and thus are in the market for rentals. But outside of students, your best bet for renters is the cafeteria help, security guards, maintenance people, etc. This ancillary staff can be your life’s blood.
Also, don’t just think in terms of traditional colleges. There are a lot of post-highschool trade schools and tech schools around, and they are sprouting up at a much higher rate than new colleges. So, too, are junior colleges and community colleges. Keep an eye out for them they have an incredible market effect.
Finally, many students grow to like an area and choose to stay around there after graduation. They’ve probably made some local connections, they have friends there, and they may have done internships nearby. And now they don’t have the option of campus housing and they must buy or rent off-campus most likely rent at first, because their finances are still too precarious for purchasing.
The ripple effect and market stimulants are used more often with pure speculation, which is not specifically what this book is about, although I will discuss it in detail. With real estate investment based on cash flow properties, in the early stages of identification, we’re buying solely based on rent, more so than location. When you begin, you will be concentrating more on areas affected by “expansion,” a term I haven’t taught you yet, but that you will learn by heart and learn to take to heart. In the beginning, you need safe houses that are going to withstand time.
Invest Here for New ConstructionInvest Here for Existing Homes; Do not buy in the Redevelopment Area
But still, the ripple effect, the ripples caused by these market stimulants, is how you will begin to start drawing circular lines all over maps, trying to locate places in which to find properties. You will be looking for where three circles intersect, where employment meets entertainment meets transportation. You will be looking for the “perfect storm” of investment opportunities. You will also learn how to interpret and draw those lines. No, it’s not as simple as drawing a circle. Your circles may go into bodies of water. Well heck, you’re not going to buy land under a lake! You’re also going to avoid well-established affluent towns and neighborhoods, places with million dollar or high-six-figure homes. That’s not what we’re about here. You’ll also take into consideration the transportation system. Where does it go? What routes do people take to get to the major employers? I want houses that are going to be within three of these stimulant rings.