BiggerPockets Real Estate Podcast - BiggerNews: The “Clues” That Point to a Phenomenal Investing Neighborhood

Episode Date: October 18, 2024

Are there “clues” that point to phenomenal real estate investing areas? We mean the areas nobody knew about until it was too late. The neighborhoods that seem to jump in price overnight, and everyone ends up saying, “I should have bought there when I had the chance!” What if there was a way to easily identify WHICH areas are in the “path of progress” and could make you serious wealth IF you buy today? We brought in an expert with two decades of experience picking these markets. James Dainard is a rental property investor, house flipper, private money lender, and every other role you can think of in real estate. He’s been investing primarily in one market for his entire career: Seattle, Washington. But, even though he’s sticking to this specific market, he’s diversified by having investments all around the entire metro area, even in places most people wouldn’t DARE to buy in. Today, he’s sharing his secrets, showcasing precisely what he looks at to identify these hidden but growing real estate areas WITHIN a market. We’ll discuss whether you should focus on the deal or the neighborhood first, “clues” that point to a solid investing area, why zoning will become your wealth-building best friend, and how to identify markets with solid cash flow or appreciation.  In This Episode We Cover: The “clues” that point to a rising real estate area most people DON’T know about yet Whether to choose a neighborhood FIRST or evaluate a deal based on its neighborhood  The magic of “upzoning” and how James uses this to boost his portfolio’s worth  The “path of progress” that will have your home value rising FAR faster than others  What to be cautious of when investing in a new area (these could ruin your real estate deal) Data sources you can use right now to pinpoint exactly where to buy And So Much More! Links from the Show Join BiggerPockets for FREE Let Us Know What You Thought of the Show! Grab James’ New Book, “The House Flipping Framework” Find an Investor-Friendly Agent in Your Area Is That Neighborhood Up-and-Coming? Here’s How to Tell Connect with James Connect with Dave (00:00) Intro (02:35) Neighborhood or Deal First? (06:51) “Clues” of a Great Neighborhood (13:14) This is CRUCIAL (19:57) The Path of Progress (25:41) Stay Away from This (31:44) Do This FIRST Check out more resources from this show on BiggerPockets.com and https://www.biggerpockets.com/blog/real-estate-1032 Interested in learning more about today’s sponsors or becoming a BiggerPockets partner yourself? Email [e-mail]. Learn more about your ad choices. Visit megaphone.fm/adchoices

We talk a lot on the show about picking the right market to invest in. But even when you do that and find the right market for you, there is still more work to be done. Markets, generally speaking, are pretty big and they have a lot of different neighborhoods, a lot of different blocks that have different characteristics and offer different types of returns for investors. Some are well established with home values that are pretty high. Some are rapidly changing and have a lot of turnover. So how do you choose which neighborhood is the right place for you to invest to meet your real estate goals?

That's today's topic on bigger news. Hey, everyone, it's Dave Meyer, host of the Bigger Pockets Real Estate podcast. And today, to help answer the question, how do you choose the right neighborhood? I'm joined by my friend and on the market co-host James Daynard. James has been in the real estate business for almost two decades. He's flipped, I think literally thousands of houses and owns thousands of units. And what's cool is that James has actually done this all in one metro area. And so for him to be as successful as he has been, he's had to get very good at identifying the right neighborhoods and matching them to the strategies that he's using at the time.

So James is going to be the perfect guest, perfect person to talk to about this topic. A couple of things I'm super excited to drill down on with James are what types of data is available to investors at a neighborhood level and how do you use that to pick neighbor? Then I know I'm the data guy, but I want to talk about what non-data information you can use to help you identify the path of progress. And we'll talk about how strategy plays into neighborhood selection, because some types of neighborhoods might be better for flips, while others are better for short-term rentals or buy and hold. And of course, we'll also hear how James has seen his market evolve over the course of his investing career. Let's get into it. James, welcome back to the Bigger Pockets podcast. What's going on, bud?

How are you? Good. You can't get enough of me this week. You can't get rid of me. No, I've been, like, surrounded by the on-the-market podcast. I was with Henry for a few hours. Then we got dinner. Then we had our podcast.

Yeah, absolutely. I'm actually visiting Seattle right now. And so not only did James and I get to go to dinner the other night, which was a lot of fun, but I got to go see him on set of his new TV show, which was very cool to watch. And Laca Devatha was there, too, if you know, her, from the Bigger Pockets universe. So it's been an exciting week. Yeah, it is.

James, like, just talk to me a little bit about the idea here first. How much variance is there within a particular market? Like, Seattle's a big city. How different will one neighborhood perform than another one? Oh, it can be very drastic. And when you're dealing with any of the market that's in a more expensive metro, whether it's Seattle, San Francisco, Chicago, New York. Well, it's definitely not in New York status.

I don't think anything is in New York status. But each street, each block, can have a massive variation. Even when we're flipping houses, we could be one street away from another house, and it could be worth the difference of a quarter million dollars on pricing. Wow. And so you really do have to understand these neighborhoods and streets when you're going to be investing in these more expensive markets

because the swings are big. And if you make the wrong choice or you pick the wrong deal, it can be detrimental. I know you do a lot of, you do development, you own rental properties. But let's just say, when you're building out your portfolio, do you sort of proactively identify neighborhoods or zip codes that you want to invest in and then look for deals there? Or do you sort of do it the other way around where you just like look for deals and then when a deal comes up, then you research the market and make sure that

it's a good neighborhood? I'm a backyard investor. So if I can't really drive to it within like an hour, I don't really buy it. We do a lot of heavy value ad, which requires us to do a lot of construction management. We got to be able to touch it, grab it, and fix it. Within this hour drive, I will buy in any neighborhood. And so what I do is I like to do a light market research, and every neighborhood has a desired return that I'm shooting for. You know, if I'm in Seattle and it's a good metro area, my return might be 6% that I'm looking for, or maybe 8%. if I'm 30 minutes out or maybe in a Class C neighborhood, I might look for a 10 to 12 percent return.

And so depending on the neighborhood, I'm going to adjust my returns. And so you have to do your market research before you establish those numbers. And so as you've researched your market, that's how we set the returns on each type of property. Okay. That makes total sense to me. But why do you have a lower return in Seattle metro? is it because there's less risk or greater chance of appreciation? And second question, just like when you're saying 6%,

is that a cash on cash return or what metric you're referring to? I look at everything on cash on cash. How much money I put now? What am I going to earn on it? That's the only really thing I care about besides tax benefit and savings. And so, you know, when you're in a better neighborhood, you typically have less issues with your tenants, you're buying a better building,

and you have more economic growth potential. whether it's zoning, jobs, economy around you, meeting income. And so I can buy at a lower return because it's a less riskier deal. It's going to give you a lot more stability in your rental property. Whereas if I'm buying in maybe a Class C neighborhood where there could be some transitioning going on, there might be a little bit higher crime rates in those areas. There could be less economic growth. Your rent income is less stable.

And your rent dependability in your income is less stable. When you have less stability in your performa, you want to adjust your returns out. That makes so much sense. We talk about this when we talk about sort of broader selection of markets, too. It's like there's not necessarily a good or bad market. You need to adjust your strategy and your expectations for return. And as James was saying, at least for me, I agree, it really comes down to the risk reward profile, right? Like I would take a 6% cash on cash return in a rock solid neighborhood where you're

have a lot of occupancy, you're going to have great tenants, you're not going to have a lot of capax, something like that, you could take a lower return. If you're in an area with a higher risk, then you need a higher upside to balance out that risk. And that's why so many different neighborhoods are possible. There's no reason you can say, like, that's a bad neighborhood. I can't invest there. As James said, all you have to do is just adjust your expectations, adjust what you're looking for in that market or that neighborhood to make it work. So James, tell me a little. little bit about the metrics, the data, or some of the clues, maybe it's not data. What are the clues you look for when you're identifying different neighborhoods to invest in? You know, it comes down to

economic growth, which is going to be, what's my median income? And then what is also going on with population increase? What's the job market like? What's the available jobs? And then also units available for rent. What is the supply and demand? I'm a big supply and demand person. If there's not enough units and there's population growth, that's a good thing to be buying it. Exactly. Even if you're in a good market that has good economic growth, but you have too many units, and there's definitely pockets in Seattle right now that have too many units. We're going to avoid those.

And so supply and demand is always one of my anchors, and then it goes into economic growth in population growth. And how do you measure those things specifically? I mean, I know there's population level data for the census, for example, but that's going to be for the whole Seattle metro area. So how do you determine where people are moving and how much supply there is in a specific neighborhood? Well, supply, you usually can get units available,

unit counts from your local broker, your leasing agent. We use the Northwest MLS. And then you can also use Neighborhood Scouts a good thing that we look at. It's a very simple program. It works well. It tells you your demographics, tells you your population gross, your median income. compiles it in a very simple, easy way for you to understand.

But the thing that we're really looking into when we're buying, and not a lot of people do it this way, is when we're buying these apartment buildings or single families and we're looking at keeping them, we do heavy value at. So we're not going to be bringing those units to rent for a good 12 months. So the supply and demand today is a factor, but it's not going to impact our performance as much as it will in 12 months. Is it?

So one trick that we do all the time is, you know, My construction lenders who finance our big apartment deals, they finance their townhomes, they finance our single family. They have a ton of market research. And one thing that they do is they track permits in Seattle. How many permits are in current progress? How many are coming to market? And it tells you what that backlogged activity is.

Permits for new construction, right? So new units that are getting built. Correct. Yes. New units that are getting built. And so when you're looking at these things, talk to your lenders. our construction lenders are some of our best information because they're tracking this for risk. When they're underwriting their loans, they want to know, okay, is there an exit?

Is it a safe exit? Is supplying demand going to affect that? And they are actually like our secret a hole because they track all this. They also track it because they need to know how much funds should they allocate for certain markets. How busy is it? How aggressive do they need to be? And they also call these people to get their business. And so it's one of your best little insight.

I think it's better than any data because they have all the information you need. So always talk to your teams, talk to your lenders, and you can get that little extra secret data that no one else is really looking at. Dude, that's such a good tip because, yeah, you have to think about incentive alignment. And, you know, lenders are super incentivized to understand this data really well and understand where money is flowing in their markets. And so if you could sort of just piggyback off of the work that they are. already doing. That's incredible. I'll just add, I mean, I haven't tried that, but that's a great tip. I'm going to try that. I always just ask, even before I buy things property managers, too, especially about rental demand, it's really helpful to understand, like, you know, these people

are fielding calls from prospective tenants saying, like, do you have anything in XYZ neighborhood or ABC neighborhood? They know where people want to live, and they know if there's a lot of units available. So that's definitely another way to do it. I also, this is sort of an old school silly way to do it, but I always just go on Zillow and sort of like poke around of rentals and look at how long listings have been on the market. Because unfortunately, unlike houses for sale, like where you can easily find days on market for any market, it's pretty hard to find rental days on market. You kind of have to just go like eyeball tested on Zillow, but that's worked really well for me in the past just to see where rental units are sort of getting absorbed by tenants really quickly.

Yeah, and that's so important to the financial performance of your rental. Like, if your absorption rate is 60 days, that's going to make a big difference in your number. Too long. And, you know, I just made a mistake where I had a tenant in one of my buildings for three years, four years, and I didn't raise the rent on them much, but they were paying $3,800 or $3,8.50 for this four-bedroom house that I had. They moved out. I painted it, got it cleaned up, put it back to market. I put it at $4,250 because rents are way above where they were four years ago. It was too high for the neighborhood. And now we've just cut it down to $39.95. But I lost 60 days during that time.

Yeah. Because there was the turn of the property, getting it prepped, getting back to rent. And then we have 30 days at too high of a rent. And, you know, that's $7,000 of my cash flow for the year is now gone. Yeah. You say that all the time because people are like, oh, I'm going to push rents. 50 bucks. It's like if you push you out 50 bucks and you have one month of vacancy, it's not worth it. No, it's not. Vacancy crushes you. And looking at those days on market are important, especially as your investor, because if you have to sit for 60 days, that's okay. You just got to get it into your performer. Yeah, that's right. Just look at what's going on. And if your gut goes, wow, there's a lot for rent, you know, and you're worried about absorption. I mean, just go where there's less green dots. We do have to take a break, but I wanted to let you know.

If you're learning a lot from James's advice on this episode, you might want to check out his brand new book. It's called The House Flipping Framework. James has flipped more than 3,500 houses. And his book, Altslines the strategy he uses to maximize value in flips and make them a sustainable part of any real estate portfolio. Go check it out now. All you got to do is go to biggerpockets.com slash house flipping and you can get the book there. We'll be right back. You just realized your business needed to hire someone yesterday. How can you find amazing candidates fast, easy, Just use Indeed. When it comes to hiring, Indeed is all you need.

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you started in, did one type of deal, and maybe it's evolved over time, and now you're doing different types of deals in that neighborhood? Oh, yeah, that's been the story of our career. You know, in 2008, when the market crashed, we had to restart. Part of that was the whole real estate market was restarting. I mean, pricing was low. There was a lot you could buy. There's a lot of burr opportunities out there, and that's what we were looking at buying. And so when you're a newer investor in you're starting, you don't go buy the biggest deals. You're buying something that you can buy, improve the value on, leverage it correctly, get some of your cash or all your cash back out, and then possibly trade that out later. And so in this neighborhood, like the Central District

of Seattle, that was something that we could buy, a lot of single-family houses, single-family lots, but it's courts right next to Capitol Hill, you're five minutes at a downtown, and we were able to buy these properties and be able to either break even on them or cash flowed them a little bit, and they were on decent-sized lots at the time. And as path of progress starts growing, or the economy started rebounding, guess what happens? Inventory that was really high in 2008 started shrinking and shrinking and shrinking, but the demand kept growing. And the demand kept growing because the tech boom was going on in Seattle, and there's a lot of jobs, a lot of people moving into the market, and then they started up-soning these properties. And so we went for having

single families. We had about five or six single-family rentals in just the Central District alone, these things that were just cash flow, burr properties, now turned into townhome sites. Oh, nice. There's been the DADU boom where you can now build in your backyard, build yourself a rental, or build it to sell it. And as this up-zoning is increased, now our units are increasing because right now, in another neighbor that got up-zone, we're building a duplex behind our eight-unit rooming house. And so if you buy in the right locations with the right zoning, and the zoning, in my opinion, is one of the most important. important things you can buy. Are you buying before everyone else realizes it's gold? If you can do that and build those units, you know, and so going from burr properties to

burr properties, but now we develop build units and the average door count per lot that we have is at eight to ten units rather than one. I want to explain and reiterate what James is saying here for everyone to understand is zoning, if you're not familiar, you probably know what this means, but it's basically what is permitted to be built on a particular lot. And sometimes in particular neighborhoods, there's better zoning than others. Sometimes it's all single family. And so it's kind of like, what's there now is what you get. In other neighborhoods, maybe there's a single family built, but it's actually zoned

for four units or eight units. And so as an investor, this is a really great opportunity because you could buy a property and maybe you hold on to the single family for a while and then eventually redevelop it. Or you created DADU, which James. reference, which just stands for detached accessory dwelling unit. It's basically like when you just add a second building on an existing lot. And these types of zoning plays can be extremely profitable, as James was just saying, it allows you to buy land, the dirt under your building just once, and you can keep adding value, new income producing, new revenue producing opportunities

from the thing that you already own. And this has always been a great strategy, but in the last couple of years as the housing shortage across the country is really spread everywhere, this concept of quote unquote up zoning has really been spreading, which is that a lot of municipality, Seattle and Washington State actually is one of the first states to really sort of embrace this idea, is they're raising the zoning so that instead of, you know, what used to be just single family zoning where you can only have one house. Now they're saying, hey, you could throw an ADU, you could throw an accessory dwelling unit in the backyard. And that means that, you know, as an investor, you can add a new structure that you can either sell off or create a revenue in income-producing opportunity for.

So this is a great tip for people who are looking for upside in their properties is check out zoning maps. I know it's super nerdy, but when I was living in Denver, I spent so much time looking at zoning maps trying to pick neighborhoods where I was going to invest. James sounds like you do something similar. Yeah, because you want to track the upside, that path of progress. That's how you get a huge lift. Because even if you're taking an area that's giving you a 6% return, and a lot of people won't buy that, including me, but I will buy a 6% return if I think that there's zoning coming up and up zoning.

I recently was looking at a property in Shoreline, Washington. I would have to lose $300 a month to keep this property. And I was going to have to leave probably about 10% in the deal, and I was going to lose $300 a month. But the reason I was really considering it was it had a massive backyard, the DADU, the detached accessory dwelling units, you could zone and put in the backyard, and you can maybe get two units by talking to people that finance inshoreline that are pulling builders in shoreline and then researching the minutes on what they're doing with this zoning. And that's a big thing. You want to go to your city meetings. Like, what are they doing?

What's on their agenda? What is on their docket? because that property, if it gives up zoned, which every neighborhood around it has is an expensive market, they have a lack of units, they have all the reasons to up zone that backyard, that property is going to double in value overnight. Yeah. But a lot of investors go, well, you can't do that there yet, so you just don't want to do it there. When people are all looking for it already, it's too late.

Yeah, that's why you've got to go to those meetings too, because you hear that they're talking about it, and then you could go and buy. And, like, yes, it's a little bit risky, but that's how you make the bigger profit is by being ahead of everyone else. Yeah, and it tells me to take, hey, I can take a lower return. If I get a 5% return, 6% return, that might be below my buy box. My buy box for a rental property, if it's in a standard neighborhood, I want to be at least getting 10% cash on cash return.

So that tells me I have to buy heavy fixers. I got to do the work. I got to improve them. There's stuff that goes along with that. But I'll adjust my return if there's that huge upside kick. And the zoning changes has been essential to our growth and our portfolio. It is how we went from 10 doors to nearly 1,000 is because you get these big pops and then you can trade them out. And researching what's going to happen, not today.

It's not about today. Well, partly about today. You want to know what you're going to be putting up front, the absorption rate. It's about what's going to happen in 12 to 24, maybe even five years down the road. Yeah, exactly. And I think trying to find places that have the good balance between today and the future is exactly right. I did something similar to what you were you were just alluding to. I bought something earlier this year that a decent cash on cash return. I think it's probably like 8%. So it's not bad.

But it's like, you know, I can hold on to that and be pretty happy with that deal. But this is in an A plus neighborhood. It's like one block from the coolest part of the city. And I was able to buy it pretty cheap. It's a duplex, but it's now zoned because of upzoning for eight units. So now when I'm ready to do it, I can take this from two units to like James said, to making townhomes, building an accessory dwelling unit. And right now, it's still cash flowing.

So that gives me the opportunity to be opportunistic about when and how I develop that plot because I have a decent return now and then have a much more exciting opportunity in the future when I'm ready for it. Yeah, and even when you're buying that way, like today, Dave, would it make sense to build eight townhomes financially on that lot? Probably not a lot of times. Yeah, it's probably a couple years away. Yeah, a couple years away.

And that's when you throw in the lamb bank, I got a good rental pot. You know, because that's where a lot of investors are so short-sighted. They go, well, you can't make it make sense today. Well, okay, that's fine. But where's the potential in five years? Like, they don't make any more land. There's the same, right? They don't make any more of it.

You know, actually, that's kind of a lie, though. They kind of do make more money. Because they change the zoning so you can actually do more units on the land. Yeah, that's true. Yeah. Well, they don't make more of it. They just make it more valuable, right? where they just zoning.

Yeah, you go from one units to eight now. Unless you're in Dubai where they make those islands in the middle of the ocean out of nowhere, there they actually do make more land. Yeah, that's true. Yeah, they do. They mass manufacturing island. That's what we should do. We need to build an island.

Yeah, off Seattle, we'll build our own island. I'm sure that won't be expensive at all. No, it's over-the-counter permit. But, you know, like what you just said is so important. It's like you're buying it in an A-class neighborhood. So an A-class neighborhood is going to have the most popular. population growth over time, right? This is where people want to live. It's a better neighborhood for a reason. Probably has better jobs. It probably has better schools. It probably has population growth and a higher

median income. If you're going to buy land, and it might not be worth it today, that's where you want a land bank, though, because that's where the money is going. All of a sudden, your land that might not make sense today, but in five years could be worth three X what you pay for the duplex. Yeah, I think that that's like the general theme, at least for me, when I'm picking in neighborhoods, is like, just look for generalized economic activity. And James has already given a couple of good tips for how to do that, looking at supply and demand where people are moving. He also mentioned going to town hall meetings.

This is something that I've done in my career, and it's so helpful because you understand where businesses are moving. You understand where the government is spending money. That's a great way to do it. The government's got a lot of money that they invest into the city. And if you know where they're putting it, that could be a great way to understand where there's going to be future demand. Similar to you, James, I actually, I bought a deal.

It was a primary residence I lived in for a while in Denver because I went to one of these community meetings and they were building the new light rail from downtown Denver to the airport and they were like plotting out the stops. But they didn't know exactly where it was going to be yet. And so people didn't do it. But like they were going to be within two or three blocks of each other. So I just found one that was going to be within. one or two of those blocks.

And so I knew even before the decision was made, there was going to be one relatively close. I wound up calling around, found a deal, someone who was willing to sell me a deal, bought it. And it was great. It wasn't until six months later until they actually finally said,

we're going to put the stop here. But, you know, you have to gamble a little bit. And it was like a very high probability that they were going to do it. That single family literally, I think, has tripled in value since I bought that like six years ago, just by going to a community,

meeting. It's like the free, easy way that you could get a leg up on everyone else investing in your market. Yeah, and also just, if you don't have the time to sit in those meetings, which a lot of people don't. They're not the most fun meetings. Send your agent. That's what I've done to. Yes. But there's always those, you know, people you put on your core real estate team, right, your lenders, your title reps, your real estate brokers, especially if it's like a niche community, that real estate broker that works specific areas, your property manager, talk to them. What do they here going on because they're boots on the ground in those specific areas and they can tell you, hey, this is what's on the docket, this is what's happening. I mean, that property that I was looking

at buying and losing a couple hundred dollars a month on, the reason I ended up IKEA's rental is my mortgage guy. He does a ton of DADUs. He owns a condo company to set up all the HOA's for people. He's really heavy into the zoning. And I go, hey, is this on the docket for the next 12 months? I just called him up. And he goes, not yet. It's probably 24 months out. And just by having a good mortgage professional that was in doing what I want to do, I could ask him and he gave me a full heads up. I didn't have to sit any meetings. I didn't have to call the city. And that's why I decided to flip it rather than keep it. Yeah, exactly. It's such a good example of just having boots on the ground and talking to people. Because, you know, I obviously love data, but these are things that aren't reflected in data.

You know, this isn't collected by the census. You actually have to go and talk to people. It's time for our last break. And then we'll have more bigger news with James. standard. People love to call real estate passive income, which is interesting because most of the investors I know are very busy. Busy finding deals, busy managing teams, busy worrying they pick the wrong market. Rent to retirement flips that model. They help investors buy turnkey new construction homes, often 10% below market value in top rental markets across the country. Their local teams handle the build, the property management, and the details so you don't have to. In some In some cases, investors even receive 50 to 75% of their down payment back at closing, and there are

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over 25,000, it's just a no-brainer. What's more, audit support is included by the number one cost segregation company in the U.S., but you must complete it before the tax deadline. Go to Costsegregation.com and use code tax deadline to get 10% off your first report. Don't overpay the IRS. Head to Costsegregation.com before April 15th. If you think property management is expensive, try mismanaging a vacancy or an eviction or a maintenance issue that turns into a five-figure problem because no one caught it early. That's expensive. A good property manager isn't overhead. Their protection against small mistakes turning into big losses. And that matters more than ever in this economy. That's why I like Mind. Unlike other property

managers, Mind manages your property like an investment. They obsessively measure the things that matter for your bottom line. Things like occupancy, delinquency, and net promoter score. And they have the results to prove it. Go to mine.co slash show me to see how mine performs and get your first month free, which is much cheaper than learning the hard way. All right, we're here for the rest of my conversation with James Daird about picking neighborhoods. James, you've mentioned a couple of great examples of times this has worked out for you. Do you have any examples of times you've bet wrong on a neighborhood? Yes. I mean, the other things you want to look at, rent restrictions, what's coming on in tenant law, What's going to prevent your growth in your portfolio?

Like as tenant laws change, is that a bad thing? Is that going to limit what you can do with your income? If there's a lot more restrictions in a neighborhood, typically it can slow down economic growth with investors and what they want to buy and what that thing's worth at that time. You know, I bought a couple single family houses back of the day that were, I was like, oh, they're on a big lot, and they're zoned for 10 units. this is great. I'm

buying this. And I put two of my portfolio, and I'm selling them a couple years later as just basically burs that I 1031ed out of. But the reason, why did I dump them? I can put 10 homes on these lots. The lots were flat. I could build on them. The issue

was the county and the jurisdiction it was in is not pro development, and nor are they set up for it. And so if I wanted to go through and develop that land, it was going to cost me hundreds of thousands of dollars to bring in utilities because the other thing you want to look at if you're trying to be in path of progress is the infrastructure there for you because you can go

buy a property put 10 homes on it it can have the right zoning you could even buy it with a commercial building zoning but the infrastructure's not there the cost are going to outweigh it and there's no extra growth so now I'm just buying a rental property it's not really path of progress because the utilities are so far down the line it doesn't matter and and so that's where I have made some like buying just based on zoning land and then going, wait, the utilities aren't coming here for another five to ten years. Or yes, it has up zone, but there's nothing coming in. Like the master plan communities, there's no grocery stores, there's no commercial going in.

There's no usability of the neighborhood. And so I have learned, hey, don't just buy because you can do it. Buy because people want to do it. All right. Last question before I let you get out of here, James. are there characteristics in a neighborhood that you look for when you're looking for cash flow that are different from characteristics that you look for when you're looking for appreciation? They're completely different to me.

I think those are two different types of assets, you know, and I think as an investor you should buy both to balance your portfolio. You always want that cash flow, the dependable cash coming in, and then you can take that cash flow and then offset your lower returns with the properties that have potential with path progress. So when I'm buying cash flow properties, I will buy in any type of neighborhood. Oh, I've seen it. I know you will. There just has to be reward with it. You know, like if I'm buying in a classy neighborhood that's got higher crime and there's issues going on there and the schools are bad and the statistics aren't looking good, it's not that desirable. There's

not a lot of population moving in. They're living there because that's where they're living. And because there's not a lot of people coming in, there's less rent growth typically. There's higher vacancy rate. There's higher property turns. When I go to release that property, I have to spend more on that statistically than I would and maybe a Class A neighborhood. So if I'm buying it a bad neighborhood, if my expectation's 10% of my return,

I'm going to be looking for like 14, 15%. It has to be worth the reward. For cash flow, are you usually finding those in B, C, class neighborhoods as opposed to Class A? Yes. Yeah, the better the neighborhood, the lower the cash flow you're going to get typically. Not always, but, you know, because there's more competition.

Like, if me and you both want to buy a nice property, we're going to go to the same fishing hole. But that's the way it works with every investment, right? The lower the risk, like a Class A neighborhood is lower risk, right? There's more demand. There's more services. There's more amenities. There's more, you know, public utilities, whatever it is. That lowers the risk.

There's always going to be higher demand for investments with lower risk. And when there's higher demand, that drives up the price. So things that have low risk are going to be more expensive. that's going to reduce your cash flow. Things that have less demand are going to be cheaper. That generally improves your cash flow. And as James said, that's just like a rule of thumb. There are obviously exceptions,

and you want to hopefully find some of those exceptions. But when you're looking for neighborhoods, you should probably expect that dynamic in most places. Yeah, and as an investor, you just got to figure out what are you comfortable with. I don't advise everybody to go buy in a neighborhood that's maybe a C neighborhood. Because even though the cash flow could be great,

and that's what you want to go achieve, you might not have the time or the mental energy to deal with it because you're going to, you know, like, I mean, one of my rentals that I have, not in the best neighborhood, I just had to spend $6,000 on my tenant turn because they've been there a while, four years, but all new flooring, all new paint,

fixing broken doors, painting the outside, the landscaping was just not good. I had to do a pretty massive overhaul on this. And if you're buying good cash flow, that can get destroyed by that turn. And so you just have to pick and choose, what you want. Now, as an investor now, as I get more experience, I'm less open to taking on problem tenant areas, because it slows me down and prevents my growth in other ways.

Yeah. Eeking out very, every dollar of cash flow can be time-consuming. Yeah, it really can. And so when I'm looking at cash flow, though, I'm looking at quality of life. I'm looking at population growth, but I'm also looking at schools, and then we're looking at crime rate. Like, is it where people want to live? Because you can be in the same geographical location. and be a quarter mile away. And if the schools are a little bit better there, the crunch is a little bit less, that's where people are going to drive to

over this section over here. And that's what neighborhood scout or things like that are great for. It just compiles it so you can look at it very easily and go, is this livable or not? Awesome. Well, thanks so much, James. This has been a great conversation.

I've learned a lot, a couple great tips for how to pick a neighborhood within your market. Any lost thoughts before we get out of here? One thing I would say is if you're looking in a neighborhood and you're looking to expand out. I'm a firm believer. You should always go drive and feel the neighborhood, though,

because it will give you that. It gives you what statistics can't tell you. Totally. Go to the gas stations, go to the grocery stores, drive the neighborhoods, what's going on? Is there infrastructure? Is there sidewalks going in? Do you see development going on around it?

Your spider senses go off. You're like, ooh, there's action going here. And if it feels like there's action, it's definitely worth exploring more. Awesome. Well, thank you so much for your advice, James. I appreciate you being here. All right, Dave.

Well, next time you're in New Seattle, we're going to go drive neighborhoods. Oh, yeah. We'll have to bring, we'll get some cameras and we'll go, we'll do a hands-on follow-up to this episode where you show us neighborhoods that you would invest in and not invest in. If you want to hear that kind of episode, let us know either James or I on Instagram or on Bigger Pockets. We will make sure to put links to both of those things in the show description below. Thank you all so much for listening to the Bigger Pockets podcast.

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