Why Limited Markets Are Key in Real Estate Investment
We have recently been reminded about the power of being focused on limited markets. We’ve always known that since before we were just focused in LA. Our competitive advantage continues to grow as we get to know the OKC market that much better. Now that our first asset there has been seasoned for more than 6 months, we feel that much more confident in the market. In this blog post, we will go over why being focused on specific markets is important.
Good, Bad, or ok neighborhoods
One of the most important reasons to focus on limited markets is to get to know the neighborhoods in the city. Every city has its good, bad, ok, or transitioning neighborhoods. Being able to understand the nuances from one side of the freeway to the other can be such a powerful tool. If you know you are in the path of progress in the city you can push a little more because you know in the long run that specific pocket will appreciate well. The only way you can figure these things out is by spending enough time in the market. Also looking at many deals in the different submarkets. This will usually take at least a year and many trips to figure it out. We also rely on partners on the ground to help us understand these subtleties. Then obviously as we own more properties in the different submarkets, we will understand those intimately that much more. Since we are investing from out of state, we want to focus on C+ or higher neighborhoods. So, understanding this is important and allows us to more accurately forecast the outcome of the investment.
Financial Assumptions
As we become better informed and own more in a market, we can make more accurate financial assumptions. The three main areas would be rents, expenses ratios, and construction costs. As we evaluate more property and own more property in specific markets we will become more intimately attuned to rents and expenses. For example, one big line item is insurance. So now that we worked in OKC for some time and have got many quotes, we can quite accurately assume a cost per door for insurance. As we work with more vendors, we can be more accurate with the cost of certain kinds of improvement items. As we base these estimates on work that was done on other projects we have done in that area. Additionally, as you do more projects contractors will not only give you better pricing but prioritize your work more. When we are competing on properties, we can comfortably tighten up these numbers and be one of the most competitive buyers.
Brokers
We highly value the relationships we have with brokers. As they see we are being more active in the market and eventually do deals with them, the higher likelihood you will be the first one to find out about new deals the brokers have. That can only happen by being focused on the market and the broker feeling your competent and will close. Also having a better knowledge of areas allows for a more robust and interesting conversation with the brokers. Also, if you are traveling regularly to the same market then you can physically meet with the brokers and create a better repour. Ultimately most of our deals come from brokers so this extremely important part of our business.
Owners
We do some reaching out to owners especially to the ones that own next to us. Again, having a better knowledge of the area will make it easier to foster relationships with them. Not to mention getting to know your neighbors can be important because they give more insight on the specific pocket and what may be some things you need to watch out for. As we build these relationships the higher likelihood, they are of calling us first if they ever want to sell. They can even potentially be future partners. Or help out with a difficult situation you are having on your property if they have dealt with it before. Getting to know some of the owners in the area can be an important tool.
We are now in a highly competitive market in the multi-family space. We need any competitive advantage we can muster. Getting to know limited markets and different faucets about them will greatly improve the likelihood of your assumptions coming true. That allows you to tighten up your assumptions and be one of the top competitive buyers. Ultimately you will begin to see some opportunities that others will not by being this entuned.