Author name: Erion Shehaj

Do you ever wonder about the decision making process that a company like Starbucks goes through when deciding where to put their new store? Think about it for a second. Opening a new store involves tremendous costs: hundreds of thousands spent on building out the store, millions of dollars committed to a long term lease and thousands of man hours spent on hiring and training the new staff. Needless to say, it’s a pretty big decision that the company HAS to get right. But as any commercial real estate broker will tell you, every retail space owner wants to lease to Starbucks. So with all these options at their disposal, on what do they base their decision? Do they just wing it or “play it by the gut”? Not a chance.

In a much smaller scale, that’s a very similar problem that a real estate investor faces when trying to decide where to invest their hard earned capital. A real estate investor may not spend millions of dollars on a property like Starbucks does, but relative to the investor’s means, this decision is just as crucial if not more. Even within a single market, like Houston, there are hundreds of different ways to put that capital at work. Does the investor put their money into cheap properties that are riskier but cashflow well or is it better to invest into premium locations that have higher appreciation rates but lower cashflow? What about a middle ground solution? And that’s not even all of it.…

If there was such a thing as a real estate “constitution”, it would consist of three words: Location, location, location. It is the best known and most fundamental concept about real estate desirability. Nothing adds more value to a piece of real estate than a good location and there’s really no second place. But when in comes to long term real estate investing in Houston Texas, the old adage can sometimes lead investors astray.

Let’s take the Inner Loop as an example to illustrate my point. I don’t think anyone that knows Houston would disagree that the area inside the 610 Loop is one of the most desirable locations in town. And for good reason. The city’s cultural heart with its museums, theaters, opera house and ballet is there. So are the best parks in the city, the best entertainment venues etc. The Inner Loop is a great location because it allows its residents to have a great lifestyle. So if you live (and invest) by the “location, location, location” mantra, the Inner Loop would be a great place to acquire great real estate that will be desirable to both future buyers and tenants alike. However, there are some storm clouds in the sky of that strategy and here’s why. The ratio between the price an investor pays for the property and the annual rent the property generates is too high to make any money. In more plain terms, the higher the price you pay for a certain amount of rent, the lower your return.…