Tried-and-True Real Estate Market Analysis Tips

Knowing how to conduct a real estate market evaluation is indispensable when navigating the investment landscape. If you’re thinking of investing in a particular area and you want to ensure you’re using your money wisely, you need to understand the regional economic trends, the average home or apartment size, demographic facts, crime statistics, and other market data. On the other hand, if you’re looking to sell a property, understanding the current market climate may help you maximize your potential gain.

Learn from the Experience of Others

I can help you to better understand the complexity and trends, while improving your overall knowledge of real estate market analysis. This may just help you learn how to evaluate the market, and using the proper methods will help you to avoid the pitfalls that many new investors face. Real estate investing can be an art and a science, but with the right mentoring, you can make your investment dreams a reality.

After reading some of the posts below, where I provide more detailed advice and share the advice of others I have interviewed during my podcast, the Best Ever Show, you may decide you want to passively invest with me. To apply for a chance to get involved in one of my apartment syndication deals, please complete this form.

real estate market red flags

6 Red Flags That Disqualify a Real Estate Investment Market

Each week, we post a new question to the Best Ever Show Community on Facebook. The Best Ever Show Community is a place where real estate entrepreneurs of all stripes and sizes can come together to interact with each other, me, and the guests featured on my podcast with the purpose of everyone helping each other reach the next level in their businesses and their lives.

What better way to add value than to ask you, the community, for your Best Ever advice on a variety of different real estate topics. This week, the question was “what is the biggest red flag for you when evaluating a market?”

We’ve all heard the investing cliché “real estate is all about location, location, location.” While I believe the ability to execute the business plan is more important than the market, the quality of market comes in close second. So, what factors should you analyze in order to determine the quality of a market? First, I recommend reading my ultimate guide to evaluating a real estate market. Then, read on to learn the 6 red flags active real estate investors said will disqualify a real estate investment market.

 

1 – No Job Diversity

If the dominate industry employs too large of a percentage of the population and that industry collapses, many people will likely become unemployed. And when people become unemployed, their ability to pay their rent or purchase a home is reduced, which will reduce the amount of rent you can demand or price you can sell a property at as an investor.

When I evaluate a market, I want to see that no single industry employs more than 25% of the population – 20% or lower is ideal. Then, if any major industry is negatively affected, the damage to the real estate market is minimized. Visit the US Census website for job diversity information.

Similarly, Garrett White would disqualify a market that lacks a diverse economy or has major employers leaving the area. A quick Google search of the real estate market will show you if any major employers have left or are expected to leave the market.

John Jacobus puts a small spin on the job diversity question. He will disqualify a market if one or two dominant employers derive their revenue from highly cyclical sources. This is determined by finding the business sector (i.e. manufacturing, technology, medical, etc.) of the top employers in the market and seeing how that sector fairs during the high and low points of the economical cycle.

 

2 – High Rent to Income Ratio

People can only spend a certain amount of their yearly salary on home expenses. Therefore, if the ratio of the median home expense to the median income exceeds a certain threshold, housing expenses are too high or the median incomes are too low for the population to afford housing expenses in the long-term.

When Theo Hicks evaluates a market, if the annualized median rent is more than 35% of the median income, the market is disqualified. Matt Skog has a similar approach – if the annualized median rent is more than 40% of the median income, he won’t invest.

Both the median rent and median income data can be found on the US Census website.

 

3 – Population Decline

The most basic and obvious red flag is a decline in population. A declining population likely indicates a declining overall economy, which includes a declining real estate market.

There are a few factors that indicate a population decline. Hai Loc and Neil Henderson look are the overall population trend, with a negative trend disqualifying a market. Garrett White looks at the trend of the number of households, with a negative trend disqualifying a market. And Youssef Seamaan looks at the net migration, with a negative net migration disqualifying a market.

Population, household and migration data can also be found on the US Census website.

 

4 – No Job Growth

Another basic and obvious red flag is no job growth. Again, if less people have jobs, the lower the demand for real estate. Hai Loc and Neil Henderson look at both the population and job trends. A lack of population and/or a lack of job growth will disqualify a market.

Yearly job and employment data can also be found on the US Census website.

 

5 – High Inventory

“Supply and demand” is one of the golden rules of economics. The higher the supply, the lower the demand and vice versa. And the lower the demand, the lower the price. Therefore, markets with high inventory indicate a low demand.

Harrison Liu analyzes the supply of apartments in a market. If there is an oversupply, he disqualifies the market.

Luke Weber also analyzes the supply of real estate in a market, using the factor “months of inventory.” Four to six months of inventory is bad, while six or more months of inventory is even worse.

The number of apartments in a market can be found on the US Census site or on the local county auditor/appraisal site. In order to determine the current “months of inventory” factor, reach out to your real estate agent.

 

6 – Local Regulations

Something that some investors may forget to think about are the local regulations governing the real estate market. But not Blaine Clark. As a note investor, he says local government processes and regulations trump the economic environment.

So, prior to investing in a market, obtain a basic understanding of the local regulations governing the real estate market and how they positively or negatively affect real estate investors.

 

What about you? Comment below: What is the biggest red flag for you when evaluating a real estate market?

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

 

rental comparable analysis on phone

How to Perform Your Own Rental Comparable Analysis Over the Phone

The rental comparable analysis is the process of analyzing similar apartment communities in the general area to determine the market rents of the subject apartment community.

As an apartment investor or apartment syndicator, the three main times you will perform a rental comparable analysis is 1) during the underwriting process when initially analyzing a deal, 2) as a part of the market survey during the due diligence process and 3) on a recurring basis after closing on a deal.

Ideally, you’ve partnered with property management company who agrees to perform the rental comparable analysis during all three of the three stages – and most importantly, during the due diligence phase. However, there may be times when you will need to perform the analysis yourself. For example, if you find a deal before partnering with a property management company, if you only have a few days to submit an LOI or if you want to perform you own analysis for comparison purposes. Therefore, it is important that you have the ability to calculate the market rents on your own. And in this blog post, I will outline the process to do so without the use of fancy property management software. All you will need is an internet connection and a phone.

The first step of the rental comparable analysis is to find 5 to 10 apartment communities (i.e. rental comps) that are similar to the subject property. That means they were built around the same time, are in the same submarket and have the same level of interior upgrades and amenities. The best resource to find rental comps is on www.Apartments.com.

Once you’ve located the 5 to 10 rental comps, log the property address, year built, number of units and contact phone number. Then, pick up the phone and call the property. The purpose of the phone call is to collect data required to confirm that the rental comp is similar to the subject property, as well as to collect the rental data so that you can determine the market rents of the subject property. And in order to obtain this information, you will pose as a resident who is interested in renting a unit.

Here are the 6 main pieces of information to obtain:

 

1 – Rental Data

One of your main goals is to obtain the rental data for the rental comp. Sometimes, this information will be listed on the rental comp’s Apartments.com page. However, you still want to confirm that the information is accurate on the phone call.

If the rental comps has 1-bed and 2-bed units only:

  • First, ask “I am interested in renting a 2-bedroom unit. How much do those rent for?” to which they will respond with the rental amount. If they offer multiple 2-bed units, whether they are different floorplans or have different upgrades, they will provide you with a range of rents.
  • In order to obtain the 1-bed unit rents, say, “Oh. Your 2-bedroom rents are slightly outside of my price range. I was hoping for an extra bedroom but how much are the 1-bed unit rents?”

If the rental comp has 1-bed, 2-bed and 3-bed or more units:

  • Follow the same approach for the 1-bed and 2-bed apartments
  • Call back a few days later and ask for rents of the other unit sizes

At this point, you will have the rental data for all of the unit types offered at the rental comp.

 

2 – Upgrades

One of the most important factors in the rental comparable analysis are the unit upgrades. You want to make sure that the units at the rental comp are of the similar type and quality at the subject property.

When gathering the rental data, ask, “have you performed any unit upgrades recently?” The upgrades to the kitchen and bathrooms, in particular, must match the upgrades at the subject property in order to qualify as a rental comp.

Additionally, ask “have you performed any property-wide upgrades recently?” The quality of the common areas must also match those at the subject property as well.

At this point, you will know the upgrades for all of the unit types offered at the rental comp, as well as any property-wide upgrades.

 

3 – Amenities Package

Another factor that must match between the rental comp and the subject property are the amenities offered to the residents. Because, like the level of unit and property upgrades, the type of amenities offered will dictate the rental rates demanded.

Ask, “something that will heavily weigh into my decision to rent are the amenities offered. What are the individual unit and property amenities?”

Examples of unit amenities are the type of flooring, washer and dryer hookup or actual washer and dryers in unit, storage availability (i.e. closet space), pet-friendliness, patios/balconies, fenced in yards, etc.

Examples of property amenities are fitness center, clubhouse, pool, online rent payment, online maintenance request, type of parking, common area, utilities included in the rent, etc.

Then, for all of these amenities, ask “are there additional monthly fees for any of the amenities you listed?”

At this point, you will know if type and quality of amenities offered match those of the subject community.

 

4 – Rent Specials

Next, you want to know the types of concessions offered. Concessions are the credits given to offset rent, application fees, move-in fees and any other revenue line items, which are generally given to residents at move-in.

Ask “do you currently offer any rent or move-in specials?” Examples are security deposit specials, rental discounts for signing longer leases, referral programs, etc.

Concessions are generally offered to boost occupancy rates. So, understanding the types of concessions offered at your competitors will give you an idea of the types of concessions you will need to offer at the subject property. Additionally, if they are offering a lot of concessions, that implies that either the demand is low or the rental rates are too high.

 

5 – Demand

Understanding the rent specials offered will give you an idea of the demand at the property (which will give you an idea of the demand at your subject property).

For additional demand information, ask “I am relocating to the are in the next couple of months. Do you have any available units are is there a waiting list?” If they have a waiting list, that implies that the rental rates may be too low, and vice versa.

 

6 – Customer Service

At the conclusion of the phone call, take a few minutes to take notes on the level of customer service you received. If you own the subject property or end up closing on the subject property, the person you spoke with will be your competition!

 

Determining the Market Rents

At the conclusion of the phone call, you will have confirmed or disproved that the property is a rental comp, keeping in mind that the upgrades and amenities do not need to be an exact match – just similar. Also, the rental comps should be similar to your stabilized subject property. That is, for value-add apartment syndications, the unit upgrades should match the post-renovation upgrades and not the current level of upgrades.

Repeat this process for all 5 to 10 rental comps.

After all of the phone calls, the apartments that aren’t similar to the subject property can be eliminated. For the ones that are, determine the rent per square foot for each of the unit types in order to determine an average rent per square foot for each unit type in the overall market. Then, you can determine the market rent of the units at the subject property using this average rent per square foot and the square footage of the subject property’s various unit types. For example, if the average market rent per square foot for 1-bed units is $1.09 and the 1-bed unit at the subject property is 900 square feet, then the market rent is $981.

 

Conclusion

This was a general outline for how to approach performing the rental comparable analysis over the phone. It is not an exact step-by-step guide to be followed verbatim. Instead, it should be used as a guide for what questions to ask to obtain the information you need to gain a better understanding of the market and the market rental rates.

Also, the results of this rental comparable analysis should be used in tandem with a more detailed analysis performed by your property management company. This analysis can be used as a starting point for the market rental rates but should not be the sole basis for purchasing a deal.

Finally, if you are just starting out, I recommend doing a few practice calls on non-rental comps to get a feel for the flow of the conversation.

 

What about you? Comment below: How do you perform a rental comparable analysis for apartment communities?

 

Subscribe to my weekly newsletter for even more Best Ever advice www.BestEverNewsletter.com

 

urban river real estate

Should I Buy An Investment Property In A Flood Zone?

Last updated 9/13/18

 

Through late August and into early September 2017, Hurricane Harvey, a Category 4, devastated parts of Texas and Louisiana. Next, it was Irma, a Category 5 hurricane, that hit numerous islands off the coast of the Southeastern United States, eventually making landfall in Florida. That same week, Hurricane Jose grazed several Caribbean islands, stalled in the Atlantic Ocean, then began making its way to the East Coast.

Almost exactly a year later, Hurricane Florence is set to hit the east coast and is considered to likely be the storm of a lifetime for portions of the Carolina coast by the National Weather Service.

The economic losses caused by hurricanes are shocking – for Harvey and Irma, the damages were in the hundreds of billions while it is too soon to tell how much damage will be caused by Florence.

As real estate investors, we must take the possibility of flood damage into account when considering an investment. A property located in a flood zone by no means automatically disqualifies a potential investment. However, it will require additional upfront due diligence on your part so that if a hurricane or flooding occurs, you have your bases covered and your investment isn’t negatively affected.

 

Should I buy flood insurance? 

For a property that is in an area designated a high risk for flooding and will be purchased with a mortgage, it is required by federal law to have flood insurance.

However, with Hurricane Harvey, neighborhoods not considered flood zones were impacted. Since flood insurance wasn’t required, many families will have to bear the tremendous financial burden themselves. According to FEMA, more than 20% of flood claims come from properties not located in high-risk flood zones. Therefore, if an investment property is on the border of a flood plane, you may still want to consider buying flood insurance.

For information on flood hazards and official flood maps, use the FEMA Flood Map Service Center. This tool allows you to enter an address or area to obtain the most up-to-date flood map. And when in doubt, contact a local insurance agent to determine if the property is at risk for flooding.

 

How much does flood insurance cost?

Compared to the economic burden placed on those without flood insurance, it’s relatively inexpensive. A study conducted by FEMA found that just one inch of interior flooding can result in nearly $27,000 in damage. The amount reaches over six figures if the flooding is a few feet or more.

Contrast that to the typical cost of flood insurance. According to Cincinnati Insurance board director Ron Eveligh, a flood policy with $250,000 in coverage will run you about $500 a year for a residential building. So, to determine if a property in a flood zone is a good investment, it is vital to account for the cost of flood insurance during the underwriting process.

If the addition of the monthly expense results in a financial return that’s outside your investment goals, you need to pass up on the deal or investigate ways to increase income or decrease expenses elsewhere. In other words, plan for flood insurance the same way you do for other expenses, like maintenance, property taxes and vacancy.

 

How do I buy flood insurance?

Damage from flooding is not covered under your basic homeowners’ or renters’ insurance. It must be purchased separately, and you can only buy flood insurance through an insurance agent. If a property is in a high-risk flood zone, it will require flood insurance before a lender will close on the loan. So, the purchasing of flood insurance will need to be taken care of prior to close in that case.

If a property is not in a high-risk flood zone, but it’s either in a moderate to low-risk flood zone or just outside the border of a flood zone and you want a quote for how much insurance will cost, it’s a good idea to reach out to your local insurance agent for a quote. If your insurance agent doesn’t offer flood insurance, you can request an agent referral from the National Flood Insurance Program Referral Call Center by calling 1-800-427-4661.

 

In general, owning investment property requires proper planning. With underwriting, lender communications, inspections, etc., your list of duties fills up quickly. However, do not neglect to determine if the property is at risk of flooding.

Taking the time to figure out if a property needs flood insurance, how much it costs and the process of obtaining it upfront can save you tens of thousands of dollars and a huge headache should disaster strike.

 

Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book

 

north america on a globe

Should You Go Big in One Market or Diversify Across Many?

I recently closed on an apartment community, which increased my company’s portfolio to over $190,000,000 worth of apartment communities under our control. We have 11 apartment communities and… 11 out of 11 are in Texas. In fact, 9 out 11 are in Dallas Fort Worth (DFW). I’ll get to the relevance of this in a second.

 

But first, after every closing, I document a lesson learned with the purpose of helping others who want to pursue apartment syndication or multifamily investing. You can read about the 16 lessons from those deals here: 16 Lessons from Over $175,000,000 in Multifamily Syndications

 

Now, let’s look at my company’s portfolio a little closer and dig into this lesson learned – or really, an observation I had. We have 2,613 apartment doors in total with 85% (2,208 doors) in DFW. So clearly, we are going deep in one market and are not currently diversifying across multiple markets. But, I frequently hear about how real estate investors should diversify.

 

I don’t agree.

 

As apartment owners and operators, if we diversify across other cities/states just for the sake of diversification, then I believe we would actually incur more risk, not less. Here’s why: all real estate deals have risks, which can be separated into three categories:

 

  1. Risk in Market and Submarket
  2. Risk in Deal
  3. Risk in Team

 

By sticking to one market that we know very well and have a proven management team in place with economies of scale, it allows us to mitigate risk factors 2 and 3 – not eliminate, but mitigate. Conversely, if we were to branch outside of one market, we’d have to find the following:

 

  • Property management – one of the biggest keys to success. Yes, we have a plan, but it must be properly executed
  • Vendor contacts – not as big of a deal if you hire a 3rd party management company since they can provide these contacts, but it is a big deal if you don’t
  • Local legal experts for contracts – a bad one can burn you
  • Knowledge of tax assessments – fairly easy to figure out, but still a learning curve
  • Build a reputation among the brokers – intangible and is vital to finding the best deals

 

Additionally, we’d have to evaluate and qualify the market and submarket. Basically, we’re opening ourselves up to all three risk factors by branching out. So, when we decide to go deep into one market, the key is to make sure that market is solid.

 

Here are the primary things I look for in a market:

 

  • Job diversity – no one industry makes up more than 20% of the jobs
  • Population – growth over the last five years and current projections show a continued growth
  • Supply and demand – look at vacancy trends and absorption rate

 

Of course, as with all generalizations, there will be exceptions. Here is a couple I can think of:

 

  • This is only in reference to being an owner/operator (i.e. active investor). If you are a passive investor and can passively invest with multiple owner-operators (i.e. syndication or turnkey companies) who have the systems in place in different markets, then that seems like a good strategy to me. In this scenario, the deal and the team (risk factors 2 and 3) are already given to you. Knowing if they’re good and reputable is something you’d obviously still need to qualify, but it makes conceptual sense to diversify if you’re a passive investor
  • While we are going deep in DFW, that doesn’t mean we’ll always only be in DFW. In fact, we actively get sent deals across the country every week – lots of them. However, in order for us to branch outside of DFW, it’s going to take an extraordinary deal combined with a local expert partner to compel us to pull the trigger.

 

To summarize, I believe you lower your risk when you go deep in a market. It’s better not to diversify across multiple markets unless the opportunity is significantly better than what you can get in the market in which you are already investing.

 

What do you think? Should you go big in one market like us, or are you finding success by diversifying across multiple markets?

 

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If you have any comments or questions, leave a comment below.

Ultimate Guide to Selecting a Target Real Estate Market

Last Updated: 10/17/18

 

A well-known and widely accepted dictum in real estate investing is “it’s all about location, location, location.” That’s because the exact same property in two different cities can have drastically different rents, quality of residents, and values. And the same is applicable for two sub-markets in the same city, or two neighborhoods in the same sub-market, or two streets in the same neighborhood.

With this being the case, how do you determine which city, sub-market, neighborhood or street to target?

That’s where a market evaluation is performed in order to select a target market. A target market is the primary geographic location in which you search for potential investments.

Specifying a target market is important for more reasons than the one mentioned above (real estate is all about location, location, location). If your target market is undefined or is the entirety of the United States or a certain state, the number of opportunities will be so large that your deal pipeline will be unmanageable. If it is too large, it will be extremely difficult to gain the level of understanding required to make educated investment decisions. If it is too small, you’ll have problems finding enough deals that meet your investment criteria. Like the porridge in the story of Goldilocks and the three bears, your target market must be just right.

When attempting to select a target market, for both my clients and for my business, I advocate a three-step process. First, identify 7 potential target markets. Then, evaluate those markets using 7 variables. Finally, analyze the results and narrow down to 1 or 2 target markets.

 

Related: 6 Red Flags That Disqualify a Real Estate Investment Market

 

Step #1 – Identify 7 potential target markets

First, identify at least seven potential target markets to evaluate. There are a few strategies for selecting these initial markets. One method is simply choosing the city in which you live as a potential target market, especially if you’re just starting out or are uncomfortable with the prospect of investing out-of-state. But even if you’re fearful of out-of-state investing, it is still important to select additional markets to evaluate so you can compare your city’s data to that of other cities to ensure that your city has a strong real estate market.

A second strategy is to Google “top real estate markets in the US.” If you’re an apartment investor, search “top apartment markets in the US.” Or substitute “apartment” with whichever investment niche you’re pursuing.

A third option is to review detailed real estate reports and surveys, created by different companies, about the condition of the real estate markets. Even if you are selecting potential markets at random or are using the Google approach, I would still recommend reading these reports for a deeper understanding of the overall real estate economy.

If you’re an apartment or multifamily investor, the reports I recommend are:

 

Related: Should You Go Big in One Market or Diversify Across Many?

 

Step #2 – Evaluate 7 markets

Next, once you’ve selected seven potential target markets, you will perform a detailed demographic and economic evaluation of each. What follows is each of the seven market variables I analyze, including what to look for, where to find the data, and how to log the data.

 

 1 – Unemployment

Specifically, you want to calculate the unemployment change over a five-year period. This will require the unemployment percentage for city for the last five years.

A decreasing unemployment rate is ideal. A low, stagnant rate is acceptable. A high and/or increasing rate is unfavorable.

This data can be found on the Census.gov website under the “Selected Economic Characteristics” data table.

 

2 – Population

You want to calculate the population growth for both the target market city and metropolitan statistical area (MSA). This will require the population data for the last five years.

An increasing population is ideal. A stagnant or decreasing trend is unfavorable, especially if supply and/or vacancy is on the rise.

Both the city and MSA population data can be found on the Census.gov website. The city data is located in the “Annual Population Estimates” data table. The MSA data is located in the “Annual Estimate of the Resident Population” data table.

 

3 – Age

You want to calculate the population change for the different age ranges. This will require the population age data for the most current year and the year five years earlier.

The increasing or decreasing of specific age ranges will dictate the property types that will be in the most demand. For example, an increasing population of 25-to-34-year olds will put luxury apartments with nicer amenities in demand, while an increasing retirement age population will put assisted living facilities in demand.

This data can be found on the Census.gov website under the “Demographic and Housing Estimates” table.

 

4 – Jobs

You want to determine how diversified the job market is. This will require the employment data for the different industries for the most current year.

A market with outstanding job diversity will have no one industry employing more than 25% of the employed population. 20% is even better. If a certain industry is to dominate, the market will struggle or even collapse if that industry were to be negatively affected.

This data can be found on the Census.gov website under the “Selected Economic Characteristics” table.

 

5 – Employers

You want to determine who the top 10 employers are in the market.

Similar to job diversity, a market with one company that employees the majority of the city is unfavorable. Also, understanding who the top employers are will allow you to track and developments with that company (i.e. are they creating a new facility, cutting jobs, etc.).

This data can be found by Googling “(city name) + top employers.”

 

6 – Supply and Demand

You want to determine the change in rental vacancy rates over a five-year period and the number of buildings permits created for 5 or more unit buildings.

A low, decreasing vacancy rate is ideal. A high vacancy rate that is decreasing is also a positive sign. A stagnant vacancy rate is okay too. But an increasing vacancy rate is unfavorable. If the vacancy rate is decreasing, you will likely see an increase in new building permits, and vice versa. A high volume of building permits and an increasing vacancy rate is a huge red flag.

The vacancy data can be found on the Census.gov website under the “Selected Housing Characteristics.” The building permit data can also be found on the Census.gov website. Locate the MSA annual construction page and select the data table for the most current year.

 

7 –Insights

Based on the “what to look for” standards outlined above, you will analyze the data and create “market insights” for each of the six market factors. For each factor, here are the types of questions you should be answering:

  • Unemployment: Has the unemployment rate increased or decreased over the last five years? Is it currently trending upwards or downwards?
  • Population: Has the city population increased or decreased over the last five years? What about the MSA population?
  • Age: What age range has the largest population increase? Largest decrease? Based on the largest increasing and decreasing age range populations, is your target investment type in demand? For example, if the largest population increase is the 45-to-54-year old range, assisted living facilities would be an attractive investment type.
  • Jobs: Which industry employees the largest portion of the population? Does that percentage exceed 20%? 25%? 30%?
  • Employers: Does one company employ a large percentage of the population? Are the top employers in similar or differing industries?
  • Supply and demand: Are there a large or small number of new buildings permits? Is the trend going up or down? Is the vacancy rate increasing or decreasing? Is it higher or lower than five years ago?

 

Related: How These Two Market Factors Will Make or Break Your Real Estate Business

 

Step #3 – Narrow down to 1 or 2 target markets

Finally, after logging the data for all seven potential target markets, analyze and compare the results and determine the top one or two best/ideal markets. Keep in mind that the markets you select will depend on your investment criteria as well.

A simple analytical approach is to rank each of the seven markets 1-6 for each of the variables. Then, add up the scores, and the market with the lowest total ranking is the “best.” For markets with similar rankings, use the market insights to determine which is superior, again, based on your investment criteria.

 

Related: 3 Techniques to Evaluate an Out-of-State Real Estate Market

 

Conclusion

In order to select a target market, you will first identify seven potentials. Next, you will evaluate each market by obtaining certain economic and demographic data. Finally, you will analyze and compare the target markets in order to select the best or ideal one or two markets that you will target for investment.

 

Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book.

 

 

Three Ways To Thrive In A Trump Real Estate Market

This post was originally featured on Forbes Real Estate Council on Forbes.com.

 

If you’re a real estate investor and been keeping up with current events, chances are you’ve asked yourself this question: “How will Trump’s presidency affect the market?”

 

Since Donald Trump has made millions as a real estate entrepreneur, common sense says he will likely implement policies to strengthen the real estate industry. At the very least, he wouldn’t make a decision to undermine it. He wouldn’t hurt his own bottom line, right?

 

But with the current political climate as it is, it’s difficult to predict what Trump will do. If you’ve tuned in to any of the major news networks since the beginning of the 2016 presidential campaign, one of the most consistent things you’ve seen from Trump is … well, inconsistency.

 

 

I don’t know what will happen over the next four to eight years, and I don’t think anyone does —Trump included. I am not a politician, nor a political strategist. But I am a real estate entrepreneur. And the good news from a real estate perspective is that Trump’s actions shouldn’t matter.

 

Ultimately, as investors, we can’t make decisions based off of who the president is or who controls the House or the Senate. While Donald Trump’s inauguration and the ensuing tweetstorm are causing some Americans to celebrate and others to mourn, there are three simple principals that real estate investors must follow to thrive in the current market of uncertainty — tried and true methods that work in any market, at any time in the market cycle.

 

1. Don’t buy for appreciation.

 

Natural appreciation is a simple concept. It’s an increase in the value of an asset over time. From 2012 to 2016, for example, real estate prices in the U.S. as a whole increased by 13%, according to Zillow. If you purchased a property for $1 million in 2012 and sat on it, making no improvements, the property would have been worth $1.13 million in 2016.

 

Sounds like a good investment strategy, right?

 

Not necessarily.

 

It’s important to make a distinction between natural appreciation and forced appreciation. Forced appreciation involves making improvements to the asset that either decreases expenses or increases incomes, which in turn, increases the overall property value. Unlike forced appreciation, natural appreciation is completely outside of your control. Say you purchased the same property in the example above for $1 million in 2008. Four years later, the property value would have decreased by $229,000.

 

Many investors, past and present, buy for natural appreciation, and it is a gamble. Eventually, they all get burned—unless they’re extremely lucky. Buying for natural appreciation is like thinking you’ll get rich at a casino by playing roulette and only betting on black. Maybe you can double up a few times, but sooner or later the ball lands on red or — even worse — double zero green, and you lose it all.

 

That’s why I never buy for natural appreciation. Instead, I always buy for cash flow. When you buy for cash flow (and as long as you have a large supply of renters), you don’t care what the market is doing. In fact, if the market takes a dip, the demand for rentals will likely increase. When real home prices dropped 23% from 2008 to 2012, the number of renter-occupied housing units increased by 8%.

 

 2. Don’t over-leverage.

 

Leverage is one of the main benefits of investing in real estate.

 

Let’s say you have $100,000 to invest. If you decide to invest all of your money in Apple stock, you would control $100,000 worth of stock. On the other hand, if you wanted to invest all of your money in real estate, you could spend $100,000 on a down payment at 80% LTV (loan-to-value) and control $500,000 in real estate. If you’re a creative investor, you could use that $100,000 to control an even larger value of real estate. That’s the power of leverage.

 

But there’s also a catch.

 

The less money you put in the deal — or more specifically, the less equity you have in a deal — the more over-leveraged you are. Consequently, the higher your mortgage payment will be. In a hot market, over-leveraging may seem like a brilliant idea, but what happens when property values start to drop?

 

According to Zillow, from 2008 to 2012, real property prices in the U.S. dropped by over 20%. If you purchased a property in 2008 with less than 20% equity and wanted to sell in 2012, you would have lost a decent chunk of change.

 

My advice? Always have 20% equity in a property at a minimum. Avoid the tempting 0% down loans at all costs. Doing so (in tandem with committing to not buy for appreciation) will allow you to continue covering your mortgage payments in the event of a downturn.

 

3. Don’t get forced to sell.

 

When you’re forced to sell, you lose money.

 

The main reasons people are forced to sell or return properties to the bank are that they speculated and bought for appreciation, or got caught up in a hot market and were over-leveraged.

 

Another reason you would be forced to sell is if you have a balloon payment on a loan. This is typical for commercial real estate but not residential. The problem investors have is when they have a balloon payment come due during a downturn in the market.

 

A way to mitigate that risk is to be aware of when your balloon payment is due and plan years ahead of time for what type of exit strategy you are going to pursue.

 

Some common exit strategies are:

 

  • Selling the property
  • Refinancing into another loan
  • Paying off the balloon payment

 

By sticking to the three principles above, I’ve personally accumulated over $170 million in real estate assets over the past four years, and at the same time, I’ve helped countless of my investors generate passive income streams. Regardless of what President Trump does or doesn’t do over the next four or eight years, if you stick to these principles and invest in income-producing real estate, your investment portfolio will not just survive. It will thrive.

 

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3 Techniques to Evaluate an Out-of-State Real Estate Market

Can’t find cash flowing deals in your local market? Don’t throw in the towel just yet. Have you considered looking elsewhere, in out-of-state markets?

 

If you decide to seek investment opportunities outside of your local market, you’ll need to learn how to evaluate a new market, and how to do so quickly – preferably in one trip. You don’t have years, or even weeks, to get to know a new market organically. You need to quickly develop a basic understanding of the market. And once you’ve qualified a potential market, you need to know which areas are trending and which areas to avoid.

 

Omar Ruiz, who’s been an investor and asset/property manager for over 10 years, is an out-of-state investor. He lives in Orange County and invests in Texas and more recently, Indianapolis. In our recent conversation, he explained the three techniques he used in order to learn the Indianapolis market prior to buying his first investment.

 

Related: How These Two Market Factors Will Make or Break Your Real Estate Business

 

#1 – Talk to the locals

 

Omar’s first approach is to speak with the locals. Who better to speak with to learn the story and attributes of a market or neighborhood than the people who actually live there. In fact, without speaking to the locals, there are certain facts and pieces of information that would be nearly impossible to uncover otherwise.

 

Omar said, “when I was down [in Indianapolis] for one of my first visits, I actually ate at a Bob Evans restaurant. I went and had breakfast there, and I was talking to the waitress girl. She was a student, and I was actually asking her – she was giving me some info about where she lives and what she was paying, and I told her ‘Yeah, I’m looking at some of these places over here, blah-blah-blah.’ And she would tell me ‘Oh, stay away from this area’ or ‘Stay away from that area…’ She was a student at the college, she kind of gave me some information about the college as well.”

 

Think about it. if someone asked you which areas are the best and which areas are the worst in the market in which you currently live, you’d probably have enough to say to fill an encyclopedia. I know I would.

 

When visiting and studying an out-of-state market, speak to the locals. Waiters/waitresses, baristas, gas station attendants, bartenders, the neighbors, current residents (if touring a property), etc. Essentially anyone who is willing to talk to you, and obtain as much insider information as you can.

 

#2 – Drive the market and take notes on a printed map

 

Another approach of Omar’s is to drive the entire market. However, rather than stare at his iPhone using Google Maps to get around, he picks up a printed map at a local gas station (and speaks to the attendant of course – see #1).

 

“What I like to do actually is instead of using the map on my phone, and Google Maps or something digital there, I’ll actually go up to a gas station and I’ll pick up a regular map of the city, a printed map,” Omar said. “Then what I do is go as much as I can throughout town and make notes on that map. Because when I’m driving around the area and I just use my phone, if I see an area that ‘Okay, this looks interesting here,’ when I come back and I try to recall that moment, it’s not that easy. But when I have that paper map there, and I actually make notations on there, I’ll say, ‘Okay, this area is bad’ and I’ll probably pinpoint and circle some properties that I looked at, put the name of it, and then I can see ‘Okay, this property was there. This is what I remember about it,’ and then certain areas that are just bad, I’ll try to kind of circle around that area. That’s been very helpful for me.”

 

Related: How to Successfully Familiarize Yourself with an Out-of-State Real Estate Market

 

WARNING: if you follow this method, make notes and markings when the vehicle is completely stopped! Fail to do so and understanding a new market will be the least of your worries…

 

Likely, there are cell phone apps that can accomplish the same thing, but the point is to log neighborhood information – the good, the bad, and the ugly –  while it’s still top of mind, rather than waiting until you get back to the hotel or home.

 

If you want to get fancy, you can use highlighters and a color-coding system to track information on a street-by-street basis (i.e. red for ugly, yellow for bad, green for good) or however detailed you want to get. When Omar performs this exercise, he looks for things like stores with “EBT accepted here” signs, boarded up homes, the types of vehicles on the street, Starbucks-type businesses, markets and convenient stores, and retail. But again, you can be as detailed or as ambiguous as you please.

 

Related: How One Market Factor Can Tell You It’s Time to Invest or Sell

 

#3 – Leverage the Census

 

Omar’s third approach, which can be done prior to or after visiting a market in-person or back in the hotel room, is to use Census data to find income statistics. “I look at the income statistics for a certain area, and I use a very methodical way of doing it,” he said. “If the majority percentage of incomes are on the low end of the scale, then that right there tells you that it’s going to be a lower income area, high crime, management intensive. Not to say that that might be a bad [market]. There’s some people that target those kind of properties in those areas and they probably do very well, but you have to have the right team in place. You have to have the right type of manager, and the right team around that manager to make those types of deals work out.”

 

Look up income statistics on the Census and within a few minutes, you’ll know exactly the type of person who is living in that market. Add in the information gained from speaking with the locals and mapping out the territory and you’ll have enough knowledge to find the cash flowing friendly areas, start analyzing deals and submitting offers with a good degree of confidence.

 

Conclusion

 

If you have the desire to invest out-of-state, you need a plan for how to gain a basic understanding of a new market.

 

Here are three techniques to help speed up the learning curve:

 

  • Speak to the locals
  • Map out the territory (literally)
  • Look up income statistics using the Census

 

 

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How These Two Market Factors Will Make or Break Your Real Estate Business

In most markets across the United States, the apartment market is strong, which is great for multifamily syndicators like myself. However, what happens when the market takes the inevitable dip? How do we know that our properties will continue to cash flow?

 

A strong housing market can mask the weaknesses of inferior properties, but when the market weakens, those inferior properties will be the first to be negatively affected.

 

Peter DiSalvo, who has over 20 years of experience providing market research and has consulted on over 1,000 projects across 46 states, has a strong understanding of this phenomenon. In our recent conversation, he explained the two market related items you should analyze to ensure the long-term viability of your properties.

 

Related: Blueprint to Successfully Invest in ALL Market Conditions

 

#1 – Location

 

The first thing to analyze is the location of your property, which can be broken down into five factors.

 

One area to analyze is the property traffic. “Ideally, you have an apartment that has visibility to a lot of traffic,” Peter explained. “If you’re not one of those that are getting 10,000 to 15,000 cars a day in front of you, that may mean you’re going to have to spend more dollars marketing for people to find your property.”

 

Luckily, you don’t have to sit outside of your apartment with a tally counter. Here are three sources Peter provided for finding the traffic information on your property:

  • ESRI, a demographer
  • Department of Transportation for the state
  • City Municipality

 

Being hidden from traffic is a red flag and a sign of an inferior property.

 

Another location-related area to consider is your property’s accessibility. Peter said, “Good ingress, egress, how easy it is to get in and out of your property – that can play into it too.” For example, “if it’s a right out only, but you know that all the traffic goes left to go to work in the morning, that may be an issue.”

 

Also, see what is located next to your property. Does the surrounding real estate complement your properties demographic? For an extreme example, Peter said, “I recently saw an apartment development that was built near a strip club… The strip club would park their billboard sign next to the entrance. It was a family project where you had this enormous billboard sign of the next ladies that would be dancing there that night.” Other examples would be a storage facility, graveyard, construction site, landfill, or anything else that isn’t aesthetically pleasing or that isn’t contributing to the property’s demographic.

 

Depending on your demographic, the quality of school may be important. “Renters are having less kids, but I would say if you’re looking at a property that has a really heavy mix of three bedrooms, that’s when you really need to look into the schools,” Peter explained. “If the [public] schools aren’t particularly good, what are the private schools like? Sometimes that’s enough to negate that issue.”

 

Finally, if you want to attract the millennial generation, Peter said there are three location-based items to consider:

  • Are they close to jobs?
  • Do they have quick and easy access to highways?
  • How close are retail opportunities?

 

If millennials are your target demographic, the answer to these three questions will be vital to your success.

 

Related: How to Find a Cash Flow Friendly Real Estate Market

 

#2 – Product

 

The second item, which is often overlooked, is the product. Peter said, “When I’m talking about product, there are multiple opportunities with this, but looking out for that functional obsolescence. If it’s something that can be remedied, there’s a big potential for rent increases… If not, it’s a big red flag. If the market has those hiccups, you may be the first to experience problems.”

 

One huge red flag is a galley kitchen. Peter defined galley kitchens as “essentially a closet with your appliances in it.” Open kitchens are in and galley kitchens are out. If it’s possible to open up a galley kitchen, that is a great value-add opportunity, but if it’s unconvertible, it’s a big red flag.

 

A compartmentalized floor plan is another form of functional obsolescence. Peter said these are floor plans “where there’s a hallway everywhere, and your unit feels like a lot of doors and hallways.” Similar to the kitchen, renters like open floor plans. If you have the ability to open up the floor plan, great. If not, that’s another red flag.

 

Access to closet space is another important factor. Lack of closet space, Peter said, “can create some high turnover once they get [in] and say ‘Well, I don’t have enough space to put my clothes.’ Without the storage stuff, you’re going to have high turnover in your property, and maybe even [be] difficult to rent.”

 

A final product-related red flag would be a sub-grade unit, or garden-level unit. Peter said, “those apartments that are partially underground, in a basement. Those are … the ones that you need to keep an eye out for. That’s a big red flag. Those are tough, no matter how you look at it. Even in good time those can be difficult to rent.”

 

Conclusion

 

To ensure continued success, even in down economy, it is vital to analyze the location and product prior to investing.

 

Peter said, “understanding that just because you have a site in a strong housing market doesn’t mean you have a great site. Make sure you have those [two] fundamental market characteristics is important to having a long-term viable project.”

 

Related: How One Market Factor Can Tell You It’s Time to Invest or Sell

 

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bonfire

How to Find Deals in a Hot Market

I recently closed on another apartment building in Dallas, TX, and will be closing on a second building that is directly across the street in early April.

 

After completing a deal, I reflect to find a lesson I learned that I can apply to future deals, as well as share with other investors.

 

Here’s a link to an article where I provide the 15 lessons I learned from my first seven syndicated deals: https://joefairless.com/15-lessons-100000000-multifamily-syndications/

 

For these two most recent deals, I had one major takeaway. But first, I want to provide some backstory.

 

There was an on-market deal that was highly publicized and marketed by a broker. My partner and I loved the deal. However, due to competition, the price kept creeping higher and higher so we weren’t sure if the deal would make financial sense.

 

Directly across the street from this on-market deal was another apartment complex. The on-market deal is over 300-units and the majority of units are 1-bedroom. Whereas the property across the street was over 200-units and is primarily 2 and 3-bedroom units. Therefore, the two buildings naturally complemented each other.

 

Fortunately, we have a very good relationship with a broker in Dallas who also happened to know the owner of the apartment across the street. The broker reached out to the owner and since it was an off-market deal, we were able to negotiate and get the property under contract at a significant discount.

 

At the same time, we were in negotiations for the on-market deal. Since we were purchasing the property across the street at a significant discount, we were comfortable bidding higher on the on-market property because we would have the cost savings that comes from economies of scale.

 

One of savings that results from economies of scale, for example, is the lead maintenance person. Instead of having one person onsite and paying them let’s say $50,000/property, you can split that cost. There are also economies of scale for marketing and advertising, leasing staff salaries and commissions, and property management.

 

Also, since one building is primarily comprised of 1-bedroom units and the other is comprised of 2 and 3-bedroom units, we have a natural referral source. If someone is looking for a 1-bedroom unit, we’ve got it covered. If someone is looking for a 2 or 3-bedroom unit, rather than saying “no can do,” we can send them across the street!

 

Now, the lesson I learned is in regards to how to find deals in a hot, competitive market: create opportunities. Don’t just look at what the brokers are giving you. Instead, get creative. Look at what else is around the on-market property and maybe you can package two deals into one transaction.

 

I can almost guarantee nobody on the face of this earth was doing that for this deal. Everyone was looking at the on-market deal, but nobody looked across the street (or elsewhere in the surrounding area) and thought to themselves, “Hmm, I wonder if I could buy that property too?” Because if they had, they might have seen the same thing we saw – a natural opportunity to combine the two deals.

 

I can also tell you that this is the first time we’ve purchased two apartment buildings simultaneously. We had to self-reflect and say to ourselves, “Okay. If we get this one deal, then we can definitely pull it off from an equity standpoint, but what if we get two deals? We know we can do one, but can we really deliver on two?”

 

We had to have faith based on our track record of delivering on our previous deals. Lo and behold, we had one investor who’s invested with us in the past few deals put up all the equity that we needed for both deals (minus the money that we put in).

 

Overall, it was a learning experience across the board, from how to find deals in a hot market (you create opportunities) and also when to strategically stretch yourself based on the situation at hand.

 

 

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north america atlas

How to Successfully Familiarize Yourself with an Out-of-State Real Estate Market

Last Updated 6-20-2018

 

A common obstacle that real estate investors run into at some point in their careers is the need to start investing in an out-of-state market. Maybe you’re an experienced investor who needs to diversify to other markets. Or maybe you can’t find any local deals that fit your investment criteria.

 

Andrew Cushman, a full-time multifamily investor who has purchased 1,566 units in the last 5 years, fell into the latter category. He lived in Southern California and needed to go outside his state to find a more affordable market. In our recent conversation, Andrew explained the two ways he was able to effectively familiarize himself with an out-of-state market before buying his first multifamily investment property.

 

Technique #1 – Contact Active Real Estate Brokers

 

Andrew’s first idea for how to familiarize himself with an out-of-state market (in his case, the market was in Georgia) was to contact the most active real estate brokers in the market. “We started looking [for properties] in 2010,” Andrew said. “We went to Loopnet and just started looking and saying, ‘okay, what brokers have the most listings in these markets?’ Then I just started calling those brokers and figured if they have the most listings on Loopnet, they are probably some of the more active brokers and those would be the right guys to talk to.”

 

During these conversations, Andrew would try to gain as much knowledge about the market as possible. One specific thing he would always ask the brokers was if they had any research reports they could share. “Companies like Axiometrics, MPX Research, and Berkadia, they do all these great research reports,” Andrew explained. “A lot of them are expensive. But what I found is when I’m talking to brokers and looking at deals, I would say, ‘hey could you send me any research reports you have on this city (or this neighborhood or whatever),’ and they’re more than happy to send it to you. So I would just get reams of useful information on the market.”

 

 

Technique #2 – Interview Local Property Management Companies

 

Another effective technique that Andrew employees is researching and creating an extensive list of property management companies that covered the market he was interested in. His main research method was interviewing. Andrew says, “I would call and interview them. [I do that for two reasons.] Number one, to find property management companies, but then also to just learn about the market.”

 

After conducting countless interviews, Andrew has created a document that lists over 20 questions he most frequently asks when interviewing a property management company (a link to this list is included at the end of this post). Here are a few examples of questions he asks and his reasoning for asking:

 

  • “’Hey, what kind of properties do you guys specialize in?’ If they primarily do A [class properties], then I know they’re probably not the best fit for us.” (Andrew specializes in B class properties)
  • “’Are you strictly third party or do you own and do third party management?’ If they own a property a quarter mile down the street from the one I’m hiring them to manage, it’s just human nature that they are probably going to favor the one they own.”
  • “What kind of due diligence services do you provide?”
  • “How do you study markets?”
  • “’What is their structure as far as management?’ You’ve got the onsite people, but who do they report to? Usually, that’s a regional, and the question I like to ask is ‘how many properties does that regional oversee?’ If it’s 6 to 8, that regional is probably going to be able to give you a fair amount of attention. If it’s 15, something like that, then that regional is going to be running around like crazy and it’s probably going to affect just how much attention you’re property is going to get.”
  • “How do you determine what is a good area and not a good area?”

 

Based on the answers provided, Andrew gains a better understanding of the market. But, he also knows if the property management company would make a good partner, based on whether they provide a good or bad answer. Only if the interview is successful do property management companies get added to his list.

 

A good answer to “how do you determine what is a good area and not a good area,” for example, would be, “well we look at crime rate, we look at population growth, we look at job growth, we look at median income, and we look at what companies are going into the area or leaving the area. And we send our people to investigate specifically.”

 

Andrew said a bad answer to the same question “would just be probably more vague. ‘Oh yeah that area is decent.’ They can’t give any reasons as to why it’s a good area or bad area.” Andrew continues, saying another example of a bad answer is, “if I get the sense that they’re just leading me along and saying, ‘oh yes it’s a great area’ so that I’ll buy the deal and give them the business.”

 

 

Conclusion

 

One of the most difficult aspects of investing outside of one’s backyard is familiarizing oneself with the new, out-of-state market’s conditions. Andrew overcame this obstacle by creating boots on the ground relationships with active real estate professions.

 

First, Andrew reached out to local real estate brokers. Through brokers, he was able to gain an overall understanding of the market via detailed research reports.

 

Also, Andrew reached out to local property management companies. He called in order to obtain market knowledge, but to interview them to see if they would be good partners as well.

 

Click here to download a copy of the questions Andrew asks prospective property management companies when conducting an interview.

 

What about you? Comment below: How do you familiarize yourself with an out-of-state real estate market?

 

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principal investment funds

How to Find a Cash Flow Friendly Real Estate Market

 

The main question that needs to be ask before evaluating a market is what is my business plan? Generally speaking, there are two main real estate investing model: invest for cash flow or invest for appreciation.

 

If you’ve been a loyal follower of this blog, you know that we NEVER invest for appreciation, so the answer to that question is simple. Now what?

 

Russ Gray, who is the co-host of The Real Estate Guys radio show, one of the top real estate podcasts in the world, with over 6 million overall downloads, also adheres to the cash flow model. In our conversation on my podcast, Russ provided a list of questions he answers when evaluating a market to determine if it’s a good candidate for cash flow investing.

 

Always Stick to the Fundamentals

 

It’s important to understand that when investing, there are always bubbles, hot money and hot markets, and all kinds of deformations that can occur seemingly at random. Therefore, it is important to always stick to the fundamentals in order to thrive in any market condition.

 

Looking at the fundamentals will tell you everything that you need to know about a market. For example, what is the cap rate trend? If you look at multifamily cap rates in a market and see that they are becoming compressed, meaning people are bidding higher than the income demands, cash flowing deals will be difficult to find.

 

Another important, fundamental question Russ asks is what is the interest rate outlook? If you see that interest rates are rock bottom low, you may not be able to count on refinancing down the road at a similarly low rate if you need to save a tight cash flow situation.

 

Besides the cap rate and interest rates, here is a list of other fundamental questions that Russ asks when evaluating a market:

 

  • Tenant
    • Who is your tenant pool?
    • Who do they work for?
  • Economy
    • What drives the local economy?
    • Is it business friendly?
    • Tax friendly?
    • Is it the kind of market that a CEO that is making decisions to survive in a tough economy will tend to gravitate towards, rather than away from?
    • What is the affordability index?
  • Infrastructure
    • How solid is the transportation infrastructure?
    • Education infrastructure?
    • The labor pool?
  • Stability
    • Do the market’s industries have a strong tie to the geography, so that jobs cannot be exported to China, India, Mexico, etc.?
    • Is it a distribution hub or energy-producing town? (Russ finds that these types of jobs are safe from relocation)
    • Is there a diverse number or industries or is there one company/industry that is dominate? (As a rule of thumb, I don’t like to see one industry that makes up more than 25% of the jobs. If that industry crashes or disappears, so does the real estate market)

 

When Russ says, “investing comes down to the fundamentals,” he really means that “investing comes down to cash flow.” Therefore, the questions above will give you an idea of whether or not the market will be a good fit for a cash flow investing model.

 

When you are investing for cash flow, you may not be getting rich quickly, but cash flow keeps you stable. Although, the upside, besides stability, is that if you discover a good cash flow market, then it will likely eventually attract the “hot money,” and you will get to see benefits on the equity side too!

 

Advice in Action

 

Follow Russ’s advice. Stick to the fundamentals. Ask the questions that will gauge the markets cash flowing prospects. And eventually see the equity benefits of the inflow of “hot money.” Then, since you initially invested for cash flow, you will be prepared to “ride it out” when the hot money recedes!

 

Related: 10 Laws of Successful Real Estate Investing

 

 

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How One Market Factor Can Tell You It’s Time to Invest or Sell

 

In my conversation Jeremy Lovett, who is a mortgage loan originator, as well as a flipper, custom home builder, and condo investor, he provided an uncommon market factor that he tracks, which enables him to determine whether or not he should invest in a certain area and if he needs to sell off part of his portfolio: the housing affordability index.

 

Jeremy’s best real estate investing advice ever was to “pay attention to your market.” It is not so much about the individual deals you are doing, but more about the entire direction of your target market. If you pay enough attention to your market, then you can make sure that you are buying when buying is smart and that you are selling when selling is a necessity.

 

The main market factor that Jeremy watches is the housing affordability index. According to the National Association of Realtors, the housing affordability index “measures whether or not a typical family could qualify for a mortgage loan on a typical home,” which is defined as the “national median-priced, existing single-family home.” The affordability index can be interpreted as follows:

 

  • Affordability index of 100 – A family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index
  • Affordability index above 100 – A family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home
  • Affordability index below 100 – A family earning the median income doesn’t bring in enough income to qualify for a mortgage loan on a median-priced home

 

When looking at the affordability index’s historical data leading up to the 2007-08 real estate crash, it was totally out of control. It got to the point where almost nobody could afford the homes that they were living in.

 

Therefore, as long as the affordability index is high such that the overwhelming majority of a population in an area can afford to live in the median-price home range, then Jeremy is comfortable investing in that area. However, if the affordability index gets to the point where half of the people living in a given area cannot afford the median-price home, then he gets worried and knows that he is going to stay away, in regards to buying. If he owns properties in the area of a declining affordability index, he will look into unloading those properties while it is still possible

 

Jeremy uses local resources to track the affordability index. He doesn’t look at the national index because that doesn’t make any sense – the affordability index is best used at the local level. Therefore, you want to either find a local resource or a national resource that breaks it down to the local level. The best way to find your target market’s affordability index is to search “(insert target market) housing affordability index” on Google.

 

graphs and a mouse

Why Studying the Market Can Help You Avoid Disaster

I had a very informative conversation with Shannon Rose, who has been a real estate investor and a CFO of a venture capital firm in the past, but has transitioned to being a real estate agent. During her time as an investor, she had many personal growth experiences and made some mistakes, which she was willing to share in order to help other investors to not fall into these same traps. Shannon’s best advice ever is that “you have to study and investigate the market” if you want to be a successful real estate investor.

 

Before the market crashed, Shannon was an active real estate investor, consistently purchasing 2 residential buy-and-hold properties a year. At the same time, she had other colleagues that were purchasing properties at a much higher rate, some buying as many as 5 short sales a day. Shannon understands that 2 properties per year may be too fast of a pace for some, and too slow of a pace for others, but she believes that regardless of your pace, it is possible to spread yourself too thin. Therefore, it is really important to make sound, savvy investments and to not have too much of your own skin in the game.

 

When the market reached it’s peak, Shannon decided that it was a good time to sell off all of her properties. 18 months later, the market crashed, and her colleagues that were buying 5 properties per day ended up having to give many properties back to the bank, which resulted in their credit taking a beating and having multiple short sales under their belts. Shannon is very fortunate that she was able to sell off her properties when she personally thought that the market was at its height and beginning a downward spiral. Not only did she avoid facing the negative ramifications that many investors at the time faced, but she was able to get out with a few great success and some smaller ones as well.

 

Shannon didn’t have a crystal ball that told her that the market was going to crash. Instead, she was aware of the economic indicators that were pointing to the crash a few years in advance because she spent the time studying the market before she began purchasing properties. Many people make the mistake of wanting to just jump straight into investing because it sounds super sexy to buy something and make a ton of money off of it. However, you have to buy savvy and smart, as well as make sound decisions based off your investigation of the entire economic spectrum and what is going on in the local market.

 

Now, most of us don’t have the time to spend days looking at economic data, so Shannon provided me with a tip on how to quickly determine the market conditions:

 

Be aware of where the big companies are going.

 

Pretty simple! If a large company is moving into an area, they have already done a ton of economic research and selected that specific market based off those results. If a company is committed to coming into a market and the surrounding real estate is at a lower price point, then it is likely that those same properties will be on an upward swing 5 to 7 years from now.

 

4 Benefits When Investing in a Smaller Area

Here are 4 benefits an investor will have when they focus on investing in a smaller target area:

 

Spend less time on research

By focusing on a smaller area, you will ultimately minimize the amount of time you spend on market research. Obviously, it takes less time to research a 3 square mile area than it does to research a whole city or zip code.

 

Truly Master the Area

Spreading out your resources to larger target market or to multiple smaller areas will only give you a basic understanding of the market, compared to spending that same amount of time focusing all of your energies on a single, small area. In doing so, you will truly master the area in no time.

Also, due to the decrease in market size, you will be able to increase the frequency of driving for dollars, and you will have the ability to meet with more of the area’s sellers and investors. As a result, you will consistently be up-to-date with the market values and understand the area inside and out.

 

Have a Better Understanding of the Competition

By concentrating on a single smaller area, along with meeting with the local sellers and investors, you will be able to see when properties are being purchased, when the property goes back on the market, and what it is being sold for. Therefore, you will also be up-to-date on what the competition is doing. It will be much harder to keep track of all of this information if your area is too large or spread out.

 

Extra Time

When you eliminate all of the time consuming activities from having such a larger target area, you can take all the extra time to become laser focused on other aspects of your business.

Use the extra time to become educated on areas like the fundamentals of real estate and real estate law. Take the time to become the most competent investor by knowing the market values and market rents better than anyone in your area. Or, simply take the extra time to spend with family and friends!

 

What are some other benefits to having a smaller target market that you can think of?

Stupidly Simple Method of Picking the Next Emerging Real Estate Submarket

WARNING: FOLLOWING THIS METHOD WITHOUT DOING OTHER RESEARCH IS AS SMART AS PLAYING RUSSIAN ROULETTE.

I’m on the road visiting different markets and looking for my next acquisition.

I came across a couple locals and they started talking about this “terrible area” that has been crime ridden for a long time. I asked where it is and they told me it’s on top of a hill that overlooks downtown.

Reeaaalllyyy, I think. Hmm…I inquire further.

Turns out it’s got breathtaking views of downtown, it’s close to some major employers and it sits high up on a hill. If there’s one thing I’ve learned it’s that the rich people want the good views and they want to go higher up to get them. 

Take a look at your city and see if that proves out. I bet it does.

So then the question because, WHY? Why did it become a bad area? In this case it’s because of some political moves that had unintended negative consequences. There’s now a new political regime and there’s some ripples of it being turned around. In fact, it has a 4-star restaurant that is nestled between a couple crime-ridden communities.

Sounds like a good opportunity to get in before the gold rush begins.

I’m driving over there tomorrow to check it out. It interests me for three stupidly simple reasons.

  1. Good views of downtown
  2. High up on a hill or mountain
  3. Close to downtown

Please, PLEASE don’t think this is the way to evaluate if a submarket is ready to emerge. Because it ain’t. For that you’ll want to look at jobs, one and five year job trends, supply vs. demand, job diversity, new construction of McDonald’s and WalMarts, as well as other factors.

This is just a, well, stupidly simple way of potentially uncovering a gold mine. Or, a scary dud and money pit. Proceed with caution on this post (I hope I’ve put up enough disclaimers!).

Either way, it’s worth a drive to check out.