JF1520: How To Select An Apartment Syndication Investment Market Part 1 of 2 | Syndication School with Theo hicks
Welcome back to another episode of Syndication School. This week, Theo is telling us the best ways to select a couple of target markets. For starters, you’ll want to narrow your search to 7 target markets. To hear the next steps, hit play on this episode now! If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Theo Hicks: Hello, Best Ever listeners. Welcome to another episode of the Syndication School series, a free resource focused on the how-to of the apartment syndications. As always, I am the host, Theo Hicks.
Each week we air a two-part podcast series about a specific aspect of the apartment syndication investment strategy. For the majority of the series, we offer a document or a spreadsheet or some other resource for you to download for free. All of these documents and all previous and future Syndication School series episodes can be found at SyndicationSchool.com.
This episode is part one of a two-part series entitled “How to select a target apartment syndication investment market.” As the title implies, in the next two episodes (and next week, as well) we will be having a conversation around target markets, and ultimately the goal is for you to be able to select one or two target markets that you will search for your investment properties, to build your team, and so on.
In this episode, you will learn first what a target market is, so we’re gonna go over some of the basics first, as well as have a discussion around what comes first – the market or the deal. Then we’re gonna have a conversation about how important the market actually is, and you might be surprised at the answer to that question, and then we’re going to outline the entire process, from start to finish, for how to select a target market and eventually achieve the goal of having one or two. Those will be talked about over the next four episodes, most likely.
Then if we have time and I don’t ramble on too much, we will go over the first step, which is how to narrow down the entire United States of America (or maybe even the world) to seven or so markets to evaluate… So let’s get right into it.
Starting off with what is a target market… Simply put, the target market will be the primary geographic location in which you will focus your search for potential investments. Now, for apartments, a target market can be a neighborhood, so it can be the smallest neighborhood or a submarket, or it can be a city, or it can be an entire MSA or metropolitan statistical area. For example, and MSA would be Dallas-Fort Worth. It’s Dallas and Fort Worth and all of its surrounding suburbs. That’s one example of a target market. But if you narrow it down to the city, then the city would be Dallas, or Fort Worth. And if you narrow it down even further to a neighborhood or a submarket or a suburb, an example of that would be Richardson, Texas. So it can be as large as an entire MSA, or as small as a neighborhood.
Now, the level in which you select your target market will be based on the size. If it’s too big, then it’s going to be impossible to understand and to actually screen deals. For example, if your target market was going to be New York City, New York City is huge, and it’s made up of lots of smaller areas that are completely different, and you’d have to gain an understanding of all of those areas if you wanted to paint a broad stroke and invest in New York… And maybe a deal pops up in an area you don’t understand, so you have to go through the process of evaluating that market first, before you even look at the actual deal.
On the other hand, you also don’t want it to be too small. For example, if you are wanting to invest in Idaho, then picking a specific neighborhood or a smaller random city in Idaho is probably not the best idea, because you’re not going to have enough deals. Yes, it’s going to be easier to understand a city with a population of 5,000 people but at the same time, there’s probably only gonna be a handful of apartments to choose from, and those likely won’t even be going up for sale. So you wanna find the size that’s just right for you. If you’re in a larger city, then you’re likely gonna want to focus on a neighborhood or a submarket within that city, but if you’re investing in a smaller market, then the entire MSA might be your best approach.
Again, as an example, the MSA would be Dallas-Fort Worth, a city would be Dallas, and a submarket would be Richardson. If you wanted to invest in Dallas-Fort Worth, then it’s probably best for you to pick out a couple of smaller neighborhoods once you’ve actually qualified the city of Dallas… Which we’ll go over how to do here later on in either this episode, or in next week’s episode. So that’s what a target market is.
Before we actually dive into how to select a target market, I wanted to talk about why it’s important to pick a market first, before you start analyzing deals. So what comes first – the deal or the market? The answer will depend on who you talk to, but for us, we believe it’s the market… And here’s why. For Joe, when he was starting off his apartment syndication journey, his first market was Tulsa, Oklahoma, which he chose because it was close to family, and a colleague of his referred him to a broker… So he had an existing team – or at least a team member – in that market.
Unfortunately, he wasn’t able to find a qualified deal. The numbers didn’t make sense, and he wanted to acquire the property with creative financing, which he was unable to do. The next market he selected was Ohio. The broker relationship they formed in Tulsa – that broker sent him a deal in Ohio. He hadn’t analyzed the Ohio market at all at this point; he just found a deal and then had to go back and analyze the market. So what he did was he looked at the Fortune 500 companies in the specific city in Ohio, and assumed that a multi-billion-dollar company would have performed adequate due diligence on a market prior to moving their headquarters there. So some analysis, but not a deep dive. That was the second market, and he actually bought a deal there, because the deal ended up working out.
The third market was Houston, and his now-business partner (wasn’t his business partner at the time) brought him a deal. He met his business partner through a mutual friend, and his partner had the deal, but no money to fund the deal, which Joe was able to do.
Joe had lived in Houston as a child, and he grew up in Dallas-Fort Worth, and went to Texas Tech University, so he was familiar with Houston, since he was in Texas and had visited friends that were there… And he also had the existing relationships. His partner, Frank, actually analyzed the market formally, and Joe did as well after the deal, and they ended up purchasing two apartment communities in Houston.
The fourth market is where Joe followed the approach that we will be discussing in this series – they did a formal analysis of the entire U.S., because they wanted to diversify outside of Houston, and based on this analysis, they landed on Dallas-Fort Worth, and as you all know, he has been able to acquire well over 4,000 units in that submarket.
Now, for all four markets it ended up working out okay for Joe, but it was kind of luck, because for example in Ohio, he could have [unintelligible [00:11:41].29] the deal and not had the wherewithal to actually analyze the market on some level, and he could have just bought the deal… Obviously, the market turned out to be okay, but what if it didn’t? He didn’t check it out first. So that’s why you have to analyze the market first.
It was the same thing for Houston – if he would have just trusted that Frank did the analysis and he didn’t do it himself… Again, Houston turned out to be a good market, but what if it didn’t? Or what if after he was sent that deal in Ohio, and the numbers didn’t pencil in, and he kept underwriting deals in Ohio over and over and over again, maybe underwrite 10, 20, 30 deals, and he finally finds one that makes sense in a certain city, and then he goes to analyze the market and realized that the market isn’t qualified? So he wasted all of that time underwriting all of those deals before analyzing the market. So it’s important to analyze the market first, for many reasons… We’ve gone over some of them, but now with more of a list fashion.
The first one is you need to have an area to actually focus on. There are over 19,000 cities in the United States (major cities) and it’s impossible to target all 19,000 cities at once. That’s why you need to start with all 19k cities, and then select an MSA, and then based on the MSA, select a city with the MSA, and within that city select some submarkets or neighborhoods to invest in, which is what we will be going over in this series.
Another reason why you need to select a target market before looking at deals is for comprehension. It’s going to be impossible to understand an entire MSA — it’s gonna be impossible to understand even an entire MSA over time, let alone all 19,000 cities in the United States. It’s much easier to understand one city, and it’s even easier to understand a handful of neighborhoods. And when say “understand”, I mean perform a financial analysis and have a feel for the market. Again, as I mentioned in the example of Joe, if you don’t comprehend the market, you could be spinning your wheels.
Another one is to actually screen deals. So not only would you be looking at 19,000 cities, but you’d be looking at all the deals within those cities, too. That’s hundreds of thousands of deals you have to look at. Even if you’re not in a large MSA, you’re still gonna have trouble analyzing every single deal that comes across your desk, because there’s just too many to handle. So that’s why you select a target market first, and it helps you disqualify the majority of deals right off the bat. Now, the deals might make financial sense, but if they’re not in your target market, you can pass, especially early on in your career. As you become more experienced, it’s easier to diversify and scale, but when you’re first starting out, you wanna focus solely on your target market, and kind of put blinders on and eliminate anything else that is not in your market, so you’re not spending your time underwriting all day long.
Another reason why you wanna select a target market before you actually find deals is to build your team. If you’re investing in 19,000 cities, that’s 19,000 property management companies, over 19,000 brokers, and it’s gonna be impossible to do that. Same if you’re in a large city, with a large MSA – you’re gonna have trouble finding a property management company that specializes in each of these submarkets. And before you start looking at deals, you wanna make sure you have your team in place, which we’ll go over the reasons why in a future episode, but mostly because your team is going to help you find deals, help you analyze deals, help you submit offers on deals, help you do due diligence on deals, and if you don’t have a team in place, you’re going to be doing all that yourself, and since you don’t have the experience with these large syndications starting out, you’re gonna need to rely on your team heavily.
And then lastly, it’s a credibility factor to have a market selected before you start looking for deals and finding your team… Because once you start interviewing property management companies, mortgage brokers, real estate brokers, one of the questions they’re gonna ask you is “What location are you targeting?” and if your response is “I don’t know” or if your response is “I haven’t selected one yet” or “I’m targeting the entire United States”, they’re going to look at you differently than if you tell them “I analyzed the entire Dallas-Fort Worth market and I landed on these three specific submarkets within Dallas-Fort Worth for investing.” That comes with an extra level of credibility, and it’s showing them that you already know what you’re doing and what you’re talking about, and they will take you more seriously.
So those are the reasons why we believe it’s important to select the target market first, before you start looking for deals or building your team or moving on in the syndication process. In fact, if you’ve listened to the first four or five series when we went over the requirements before becoming a syndicator, once you’ve met those requirements and you’re ready to start your business, selecting a target market is going to be one of the first things you do, while at the same time building your brand, which is going to be a focus in the future episodes – how to build a brand.
Now that we’ve discussed why you need to pick the market first – again, before we go into how to actually select it, I wanted to talk about how important is the actual target market. You’re gonna be spending all this time analyzing these markets, and visiting them, talking to people in them, so how important is it to pick the right market? Well, I’m gonna give you an example. Let’s say that you decide to invest in Cincinnati, and you picked the city as a whole as your target market.
Now, within Cincinnati there are smaller neighborhoods – some good, some bad, just like any city. The reason I’m doing Cincinnati is because I know Cincinnati very well, because I lived there for about 6-7 years… Two neighborhoods in Cincinnati – one is Hyde Park, one is East Price Hill. Let’s just quickly go over five different market factors for those two neighborhoods.
For median household income, Hyde Park is $75,000, and East Price Hill is $30,000. For median rent, Hyde Park is just over $750/month, and East Price Hill is just over $500/month in median rent. The average single-family house value in Hyde Park is almost $400,000, whereas for East Price Hill it is under $100,000. The population below the poverty level in Hyde Park is 8,2%, and for East Price Hill it’s 41,8%. And lastly, the number of structures with five or more units in Hyde Park is 12,8%, and it is 30,2% for East Price Hill.
So what’s the point of listing out those statistics? Well, the point is that within the larger city of Cincinnati, there are multiple neighborhoods, and just through these two examples right here, these neighborhoods are completely different, and would be good for completely different investment strategies. When you’re comparing these two neighborhoods, the Hyde Park obviously has a higher median income, which means there’s a higher rent, and the property values are much higher, and there’s less people below the poverty level, but there aren’t as many apartments available in Hyde Park, whereas for Price Hill, most of the economic factors are low (below the Cincinnati average), but there are a lot of apartments available to buy.
The whole point is that you can select really any city in the United States and find a Hyde Park and an East Price Hill and neighborhoods all the way in between. The overall MSA, and even the city, don’t matter as much as the neighborhoods or the submarkets, or even the actual street-by-street level analysis, which is why our market evaluation that we’re gonna go over is conducted on multiple levels.
First, you select an MSA, and you evaluate it at the MSA level. Then you evaluate it at the city level, and then you evaluate it at the actual neighborhood level. Because at the end of the day, you’re going to be able to find a market in which you can implement your value-add business plan, if that’s what you choose to pursue, in any city. All you need to do is do a deep dive into the neighborhoods in order to find the ideal neighborhood that aligns with your investment strategy, which we’ll discuss.
And then lastly – and if you’re a loyal Best Ever listener, you’ve heard this before – the three immutable laws of real estate investing. As long as you follow these three laws, then it doesn’t matter what market you’re in or what the actual market conditions are, you will be able to create and scale and maintain an apartment syndication business.
Those three laws are buy for cashflow, secure long-term debt, and have adequate cash reserves. We’re gonna go into a little bit more detail on those three laws in our series next week… But I just wanted you to be aware, again, of those three laws, and how to apply those to your business, and how those will help you invest in any market.
To quickly summarize, the market, the MSA, the city are not as important as the actual neighborhoods within that city, and you having the knowledge to find those good neighborhoods, and having that boots on the ground, very low-level understanding of — so what’s important is for you to understand the actual neighborhoods within those markets.
Now that we’ve talked about what a target market is, why it’s important, or what parts of the market are important, the next three episodes are gonna focus on how to actually select a target market. So it’s going to be a seven-step process… First, you’re going to narrow it down to seven actual markets – cities or MSA’s – which it’s looking like we’re probably gonna go over that in the next episode, because we’re running out of time here.
Number two is to record the demographic and economic data for those seven markets, which we’ll also discuss in the next episode. Then, based on that analysis, we’re gonna rank those seven markets, from the best to the worst, which we’ll also go over in the next part. And then based on that ranking, we’re going to select the top one or two target markets, which we will be investigating even further, because as I mentioned, you need to have a submarket or a neighborhood or a street-by-street level understanding of your target market in order to find the best areas to invest. That further investigation is gonna happen in next week’s series.
We’re also gonna take a deeper dive into those three immutable laws of real estate investing, and talk about how to create a market summary report for your target markets. We’re going to be discussing one through four in the next episode, and we will be discussing five through seven in next week’s series.
To conclude, in this episode you learned what a target market is, and that is the primary geographic location in which you will focus your search for potential apartment investments. You’ve also learned why you should select and evaluate a target market first, before looking for or analyzing deals, and before finding your team members. Then we also had a discussion about why the target market isn’t necessarily the most important factor, and what we mean by that is the overall MSA’s in the city aren’t as important, because within any city you’ll be able to find at least one specific neighborhood where you can implement your apartment syndication investment strategy.
And then finally, we outlined the overall process for evaluating and selecting your top one or two target markets, which we weren’t able to start in this episode, but we’re going to do a deep dive in the next episode. You’re actually going to get two free documents in the next episode as well.
To listen to the other Syndication School series about the how-to’s of apartment syndications and to download the previous free documents, as well as the free document that you’ll be able to get in tomorrow’s episode if you’re listening to this at a later date, make sure you visit SyndicationSchool.com. Thank you for listening, and I will talk to you tomorrow.