For 40 years my wife and I have owned rental property. For 35 years I have been a San Diego apartment broker. I learned a lot, too much the hard way. Some of what I learned is summarized below.
Building legacy wealth is about building equity. If you want to build equity, then where you invest matters a lot.
Invest in a supply-constrained market
If you want cash flow, invest in 35 states which do not touch the ocean. There, 2% appreciation and 4/1 leverage mean 8% equity growth. Even if the cash flow were 10%, it would NOT match a supply-constrained market like San Diego’s historical yield.
There’s a hidden danger in those markets, too. Without supply constraints, those markets will over-build and all landlords will suffer extra vacancy and lower cash flow, maybe for years.
I explained the dramatic power of supply-constrained markets in an earlier post. And within supply-constrained markets, like San Diego, your equity can grow faster in some ZIP codes.
Invest in the right submarkets
Here’s a fact that surprises many new investors. Smart apartment investors who want to build wealth don’t always buy property in the top third of ZIP codes. More than half of those wealth-building investors buy in the ZIP codes in the bottom third of the socioeconomic continuum.
Common sense will tell you why top investment opportunities are more common in the bottom third of ZIP codes If you pay premium rent for a place in a fancy ZIP code, what would you expect to get for your money? You’d expect the building to be in excellent condition. You’d expect the fixtures and finishes to be top-notch.
If you were the owner of a building like that, what could you do to improve the value? The answer is, not much.
In the lowest third ZIP codes, that isn’t the case. There are many ways to improve the value of the property. That larger upside offers greater potential opportunity to create legacy wealth. You can buy an asset with the right things wrong with it. Then renovate the 40-year-old kitchens and bathrooms. Renovations like that increase the value of the building.
What’s your experience? Where have you found the best wealth-building investments?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”