Investment ABC's

Recently a seminar presenter had a great way to differentiate the various types of real estate investment areas. Market areas can be broken into 2 parts the "lower end", homes priced under the conforming loan maximum, and the "high end."

The "lower end" is where small and first time investors typically learn real estate investment and the focus of this article, but these generalizations can be applied to nearly every segment of real estate investment.

The investment real estate arena can be broken into 3 general parts. Grade A or the areas that had value 3 years ago and will have value again 3 years form now, grade B or the areas that will improve in the next recovery and grade C properties the bottom and most challenging areas.

Each area offers a unique opportunity for different types of buyers. For example, everyone knows the first three rules of real estate are location, location, location. The top areas always draw the strongest financially in the market segment, the Grade A areas. Those less competitive financially move to look into B areas on the hopes of improving in the future.

With regards to investments, this adage holds true as well. A areas will be tighter and from an investment standpoint are good places to park money, like a bond. This is basically a capital preservation strategy. If the market goes down, A areas will be the first to recover in a following upswing. In 2009, these areas are under pressure.

The best returns will me made in the B areas. B areas have a lower price point, they may be older homes. These homes seemed to have bottomed and are forming bottoms in places. All other things being equal, this is a good place for capital growth in the long term. These homes should recover quicker than average due to the homes being more affordable in lower price points.

A areas are close or over the conforming loan range (629k). B areas are mid and lower ranged, generally far below the conforming loan limit. C areas, in my opinion, are for cash buyers only and make sense for LONG term holds (once again, like a bond) the appreciation will be slow but the prices on a per square foot basis are generous making strong cash flow streams, attractive only when unlevered. Price is a factor.

Places like San Ramon, Walnut Creek, Pleasanton, Dublin and Pleasant Hill start in the lower end A range and move into the upper end homes. Concord, Martinez and Livermore are mostly in the B category with A, C, and higher end components. Antioch, Pittsburg, Brentwood and outlying areas are in the solid C category.