>>>> Investing in the Right Market
BY KEN McELROY
Independent Rental Owners who successfully gauge
growth indicators can help mitigate investment risk.
here certainly are many ways to
T
invest money; however, as inde-
pendent rental owners know,
real estate has significant
advantages over most other
types of investments. What other invest-
ments provide a monthly cash flow? Let’s
be honest, cash flow should be the reason
to invest in the first place. With real estate,
investors can control their cash flow—pro-
vided they follow some basic rules.
While almost every independent rental
owner’s personal goal is to become finan-
cially free and not be dependent on any-
one or anything, few rarely achieve this
financial freedom. Most serious indepen-
dent rental owners achieve financial free-
dom if they have a solid plan and follow
it. Without a solid plan—or goals—it is
impossible to track progress.
Part of that strategy involves investing
in the right market. It is imperative that
the decision of where to invest be based
on sound research.
Keeping an Eye on Cash Flow
Cash flow is influenced by many fac-
tors, including price, interest rates,
employment, population and property
management. Probably the most impor-
tant factor is selecting the right property
in the right market.
The market is more important
than the property itself. It is better to
own an older, smaller property in a
hot market than a beautiful, new
property in an area that is struggling
or is dependent on one major employer.
An investor’s goal is always cash flow,
and if the investor can achieve higher
occupancy in a high-demand area, this
will be a better investment and provide
more passive income with much less time
and effort. Investors may end up paying
more for this location, but in the long
run, they will be much happier with their
investments.
w w w. n a a h q . o r g
Two of the hottest markets in the Western
United States are Las Vegas and Portland,
Ore. There, my company has substantial
real estate investments, and we spend a
limited amount of time overseeing these
investments because these local economies
are booming; both employment and popu-
lation are expanding at a rapid rate.
The booming economy is keeping
properties in these areas fully occupied,
which in turn minimizes marketing
expenses and eliminates concessions to
new renters—both of which create more
cash flow.
Success in these markets was strategic:
Investment was made in these markets
when each local economy was depressed.
Research showed these two markets fig-
ured to grow due to indicators such as
building permits, which are one strong
indicator of population and employment.
Hitting It Big With Casinos
Every market is unique and needs to
be fully evaluated before an investor takes
the plunge and invests.
Indicators for each economy vary from
city to city. For example, New York City is
bidding for the Olympics in 2012. Should
New York receive the bid, there is no
This is the first in a
collection of articles
from owner/author
Ken McElroy, who
wrote “The ABC’s
of Real Estate
Investing,” which
was released in
September 2004
and became No. 1 on the
BusinessWeek best seller list in
December 2004. McElroy covers
the topic of goals in more detail
in chapter two of his book.
question that there will be a large surge
in the Long Island economy and redevel-
opment along the riverfront where the
Olympic Village is planned.
In Las Vegas, one major contributing
factor was the massive new casino con-
struction that was being planned. Steve
Wynn is opening the Wynn Casino in the
next several months and is hiring 16,000
employees over that time. The majority of
these employees will be from out of state
and will need housing.
In Arizona, the recent completion of the
Glendale Arena, which will host major
sporting events and major concerts, provid-
ed a real economic boost to its local area.
Real estate investors who watched these
indicators are now reaping the rewards
with increased values and high occupan-
cies as this area continues to redevelop.
Non-Boom Times
Those who own property in a market
that is trending negatively should take a
serious look at how much longer that
property should be held. Consider if this
down cycle will affect cash flow.
Markets will always come in and out of
favor and are traditionally cyclical in
nature. Investors should not be too
alarmed at short-term corrections in the
economy and should keep focused on cash
flow and long-term goals that have been
determined through strategic thinking.
Understanding the local market before
investing is paramount. If investors keep
their eye on the cash flow or potential
cash flow by looking at the facts, both for
the property itself and the local market,
they can help mitigate investment risk. ■
Ken McElroy is President of
MC Realty Advisors in
Scottsdale, Ariz. He can be
reached at 480/998-5400.
McElroy is a NAA Region 7
Vice President.
May 2005 UNITS 35