Real Estate Investment Choices: You Want a Clean $10 or a Dirty $20?

It amazes me every time I see it, but some folks are so tied to either appearance or what others think, that it affects their judgment. I mean really, if I offered you the choice between a clean 10 dollar bill and dirty 20, wouldn’t you choose the 20?

Of course you would. Investment choices in real estate force this kind of decision all the time. Here’s a recent example one of my clients faced not long ago.

In the San Diego area, La Mesa (LM) is a very attractive investor destination. People, whether owners or renters, tend to live there on purpose as opposed to for financial reasons. East San Diego (ESD) is one of the oldest, almost original SD areas that in the ’60′s was where your grandparents might have lived, but not today. ESD’s reputation became one of neighborhoods for low income families, with relatively high crime, poorly performing schools, and not one national grocery chain. Also, a lot of gang activity was the norm.

I’ve taken my clients to LM to invest in income property over ESD for decades at a 20/1 pace. Historically, LM has attracted higher quality tenants, demanded higher rents, experienced much better appreciation, was much more in demand, and sold about a half hour after the decision to sell was made.

A few years ago things began to change in ESD. The government decided it needed massive redevelopment, and the private sector then followed with even more capital. New schools were built. Police presence was not only increased, but in a permanent way with new stations and ‘neighborhood’ satellite offices. Albertson’s is there now, the first national chain grocery store of its size in probably 50 years in ESD. And the ultimate indicator that an area has finally arrived?

Drum roll please…….. They now have their very own Starbucks!

The bottom line is that more hundreds of millions of dollars in both public and private money has been poured into ESD with predictably positive results. And at the beginning of this process I began to recommend to some of my clients that they should strongly consider moving some of their equity to ESD.

Jim and Tess did exactly that. I found four units for them that included a couple duplexes on one lot. I also noticed that a split had been almost completed then abandoned several years before. To make a long story short, they followed my advice and traded into the units. They then finished the work on the split, ending up with two separate duplexes on their own lots.

The appreciation for the subsequent years exceeded that of LM, something that hadn’t happened in my experience, and I moved to San Diego in 1967. I traded Jim and Tess out of those duplexes just under two years later. They realized a gain of over $200,000 in roughly 22 months. If they’d have gone to LM they would have made a very solid gain, but nothing like that. Their ESD tenants didn’t speak English very well, and the units required some TLC early on, both not likely to have been factors in LM properties.

I estimate Jim and Tess made an additional $50,000 by going to the so-called ‘inferior’ location. And to their credit they weren’t surprised that a dirty $20 was much better than a clean $10. Imagine that.

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About BawldGuy

I'm second generation real estate, first licensed in fall of 1969. Having been mentored by several iconic brokers, I'm also CCIM trained, having completed all 200 hours back in 1980. Have successfully executed well over 200 tax deferred exchanges, many of which have been multi-state in nature. Strong points are analysis and the creation and real world application of Purposeful Plans employing several strategies synergistically. The idea is to arrive at retirement with the most after tax income possible, backed by the largest net worth.

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