Why Submarket Analysis is Crucial for Successful Investments

There are so many different cities/markets all over this country that are great for cash flow. Once you select a market, you then need to dig into specific submarkets. Just like in any city, there might be some areas you don't want to invest in. So, we dig in deep into the different submarkets to pinpoint which ones should be our targets. 

So, why do we pick the submarkets that we do, and how that has led to our success so far.

Why submarkets are important

Now that we have bought our second asset in Oklahoma City (OKC), the concept of digging deep into submarkets is becoming that much more evident. For example, our Norman Creek deal is an affordable option in a better area. Through COVID, we have had some issues, but occupancy has stayed high and delinquency low for the most part. 

The tenants we did have issues with received government rental assistance through the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act. Ultimately these tenants try to find a way to make things work. Otherwise, they need to move to a less desirable area. 

Compared to other deals we were looking at in a worse submarket, the differences were apparent.  This other asset had taken a significant increase in vacancy and delinquency. The big part has to do with tenant demographic and crime that is happening in the submarket. So, as they say, location, location, location.

Improvements to the property would make a difference, but it's hard for us to impact the crime in the surrounding area. Occupancy, delinquency, and turnover will continue to be an ongoing problem at that property. Hence, we passed on that property, mainly because we are longer-term holders. So, you can see why buying in the right spots could have a lasting impact on returns over the years.  Some of these properties in worse areas can look great on paper. But in actuality, the returns could be far from great.

In better areas, occupancy and rents are usually trending up. So, even if you are paying more for an asset in a better area, you are much better off in the long term. Not to mention, you will experience less stress and volatility, and there is no price tag on that.

What’s our process to pick the submarkets?

Now that we have been working in OKC for some time, we have become familiar with our target submarkets. This came to be by underwriting many properties in different submarkets in OKC. Of course, the first thing we look at when looking at new pockets is the crime levels. There is excellent crime data out there because local law enforcement agents report all types of crimes. Below is an example of data at one of the census blocks of one of our properties.

These crime indexes usually range from 50 to 500. We like to see crime below 200 on average when looking at a new area. If we have a further concern about crime, we will discuss with the local police station if they have had issues at that particular building.

The next significant factor is what the household median incomes are in the area.

For the OKC market, we like to see income levels around $50,000 annually or higher.

Since we are not on the ground, we rely on our manager's opinion regarding areas and the properties themselves. For example, on the deal we passed on above, our manager said that she felt uncomfortable at the property and didn't have good things to say. So, we value our manager's opinion.

Next, we will look at what kind of retail establishments are around. Places like Panera Bread and Starbucks are good signs. Giant national retailers like that do extensive research in areas to make sure they can run a profitable business. So, if they have confidence, it gives us another vote of confidence. Also, we like seeing some good national grocery chains, which are a huge need for our potential tenant base. We also check the local scores of the school system to see how well students perform against the average, as that could be another positive for potential tenants.

Lastly, it’s just a gut check. How does the area feel when you walk and drive it? What kind of people are walking around in the area? Does there seem to be a high presence of the homeless? Do you feel safe walking the neighborhood?  

It takes time to determine the best submarkets

Ultimately it takes time to figure out which submarkets are good. This is why focusing on specific markets, in general, is crucial. For example, it's been evident with our Norman Creek property that being in a good submarket is important. We have been beating projections there by 34%. This is partially due to good management, but the area has tremendous demand, keeping occupancy high, with the ability to push rents higher than anticipated and keep