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SHOW NOTES FOR EPISODE 604: FINDING THE BEST MARKET
Investing in the right market is critical for successful real estate investing. Choosing the wrong market can seriously impact your property’s short and long term profitability. In this episode, Bill lays out the steps necessary to find a good emerging and profitable market for your real estate investing activities.
Previous episodes of our 10 Steps to Real Estate Investing Success series have thus far included:
- 590: Is Real Estate Investing For You?
- 592: What Type of Real Estate Investing is For You?
- 594: Building a Winning REI Strategy!
- 596: Knowing Your Numbers
- 598: The Business of Real Estate Investing
- 560: The Importance of Your REI Team
- 602: How to Choose the Right Real Estate Investing Strategy for You
Finding the Best Market
Today, I’m going to talk about how to find the best market to invest in.
However, I realize that finding the best market does not always pertain to every real estate investment. If you are investing in syndications, for example, the market has already been selected by your operator/GP/Sponsor. But that doesn’t mean you should ignore the fact if it is a good or bad market. Part of your due diligence needs to be verifying that the apartment or commercial property that is under syndication is in a good market.
If you are buying your own properties, it’s imperative that you do your due diligence to make sure your property is located in a market where your property will increase in value over time.
But keep in mind, it isn’t just about equity. A declining or stagnant market can also impact other key factors such as rents, which impacts cash flow. It can also affect the quality of tenants available to you which can affect repairs and maintenance, evictions, vacancy rates and more.
If you are investing in your own city, that’s best, if it can produce the numbers you need!
As I’ve mentioned numerous times on my show, I prefer emerging markets.
Definition of Emerging Markets
Emerging markets are metro population centers in the USA (MSAs) and secondary and tertiary markets around the world where there is a strong demand for housing and where properties are in areas where properties are significantly increasing in value. In these areas, more jobs are being created. And, where you have more jobs, you have more people. This creates a pent up demand for housing (apartments, single family homes, etc.) and other support services and businesses. In areas where larger businesses are relocating or expanding, new jobs are being created, appealing lifestyles are emerging, rental potential increases, and retail shopping centers and services are needed to meet the needs of the growing population. This phenomenon also creates various paths of progress.
First Steps in Researching New Markets
#1 – Start talking with local brokers
#2 – Do online research (census.gov, IRR.com, data.gov, globest.com). In Google: type city name and write “economic growth” or “potential new business.” Put city’s name and Forbes, Wall Street Journal or WSJ, Fortune, US News & World Report and the local Business Journal for that area.
Vinney’s Secret Research Trick!
A frequent guest of the Old Dawg’s Podcast is Vinney Chopra. He has always purchased in Emerging Markets. A trick he uses to get good market information is this: He signs up to receive Offering Memorandums (OMs) from multiple brokers in his target areas. The great thing about OMs is that because the big brokerage firms have extensive research budgets and resources, they do excellent market research. The OMs always have, in the last pages of the OM, a wealth of market information with extensive exclusive data. He would use this data for his own research and share it with his investors.
Vinney will occasionally bid on OMs he receives via email (if the numbers make sense) but does not often win the bid because the prices are usually to high compared to the off-market properties he finds.
#3 – Research the jobs numbers
#4 – Look at occupancy numbers and trends up or down – Is it 90% and above?
#5 – Look at multifamily building permits being issued in the city
#6 – Migration info (who and how many are moving there)
# 7 – Contact the local Chamber of Commerce (they have great info on local business growth)
#8 – Contact the local planning commission on their plans for 5, 10, 20 years down the road
#9 – Visit the city – meet with chamber, brokers, others
#10 – Look for new employers in the area, new hotels, restaurants, WalMarts, large manufacturing plants, etc
And this is all BEFORE you bid on a property!
Some thoughts on Researching and Planning
1) Research the curve – the concept of existing property market cycles is not myth, it’s a fact and is generally accepted to be based on a price-income relationship. Check the recent historical price data for properties in the area of the state or county you’re considering purchasing in and try to determine the overall feel in the market for prices currently. Are prices rising, are prices falling or have they reached a peak?. You need to know where the curve of the property market cycle is at in your preferred investment area.
2) Get ahead of the curve – as a basic rule of thumb, professional real estate property investors seek to buy ahead of the curve, or as close to the base of the bell curve as possible. If a market is rising they will try and target up and coming areas, areas that are close to locations that have peaked, areas close to locations experiencing redevelopment or investment. These areas will most likely become ‘the next big thing’ and those who buy before the trend will stand to make the most gains. As a market is stagnating or falling many successful investors target areas that enjoyed the best levels of growth, yields and profits very early on in the previous cycle because these areas will most likely be the first areas to become profitable as the cycle begins turning towards positive once more.
3) Know your market and who are you buying property for. Are you buying to rent to young executives or workforce housing, purchasing for renovation, to resell to a family market or purchasing to rent out real estate for short term? Think about your market before you make a purchase. Know what they look for in a property and ensure that it is what you are going to be offering them
4) Think further afield. There are emerging real estate property markets around the country and around the world where economies are going from strength to strength, where a growing tourism sector is pushing up demand or where constitutional legislation has been or is about to be. Look further afield than your own back yard for your next property investment and diversify that real estate portfolio for maximum success.
5) Purchase price. Set yourself a budget that will realistically allow you to purchase what you’re looking for and profit from that purchase, either through capital gains and/or rental yield.
6) Entry costs. Research fees, charges and all expenses you will incur when you buy your property. They differ from state-to-state. Know how much you will have to incur and factor this amount into your budget to avoid any nasty surprises and to ensure your investment can become profitable.
7) Capital growth potential. What factors point to the potential profitability of your real estate property investment? If you’re buying to rent out, are there any indications to suggest that demand for rental accommodation will remain strong, increase or even decline? Think about what you want to achieve from your investment and then research and find out whether your expectations are realistic.
8) Exit costs. If you will incur substantial capital gains taxation liability if you sell your property investment for profit, will that render the investment profitless
9) Profit margins. What levels of capital growth can you realistically gain on your property investment or how much rental income can you generate? Work out these facts and then work backwards towards your initial budget to work out your potential profit margins. At all times you have to keep the bigger picture in mind to ensure that your real estate investment has good potential for profit.
10) Think long term. Unless you’re buying property off-plan and intending to flip it for resale and profit before completion, you should view real estate investment as a long term investment. Real estate is a slow to liquidate asset, cash tied up in property is not simple to free up. Take a long term approach to your property portfolio and give your assets time to increase in value before cashing them in for profit.
Developing Local Contacts
The next step is to find the people who know the markets best. Commercial Brokers, Property Managers. Start building relationships with these people early on. Some of the top real estate investors may study a market for a year or more before even approaching a broker. For example, when one leading investor finally knew he wanted to invest in the Atlanta area, he scheduled a 4-day trip. On the trip, he talked to the top people at major commercial brokerage firms (presidents, executive VPs, etc.) and other in the area. When he returned home, he started texting and mailing his contacts every 10 days. He would send articles on Atlanta that he found and would ask them to send him articles about Atlanta. He also sent gifts (chocolates, gift cards, etc.) to stand out and win favor. In the beginning, the properties brokers would send him were overpriced and he wasn’t interested. As the brokers started to see his property criteria and that he was a serious buyer, they started offering him “pocket listings” (which are off-market properties that are often below market value) that better met his criteria.
In Conclusion
This may seem like a lot of work and it is. But taking the time to do it will yield significant returns. I have seen 300% returns in anywhere from a 3 to 6 year time period, all because I bought in the right markets. I know that that is certainly not the norm nor would I say you will achieve those numbers. All I can say is that makes sense to put in the time required to buy right
Smart investors, seeking out emerging markets first, will find the best areas to invest for both the short and long term.
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