Trying to find the right market to invest in can be a monumental and confusing task. Remember, the goal of market analysis is to minimize the risk of your investment while maximizing the opportunity for you to earn a higher return. Below is a list of Seven Steps I perform whenever I am looking to invest in any market. (This post has steps 5-7)
Step #5: Shop Your Competition
After determining a specific market area, it is time to really shop your direct competition.
Survey the other property managers and other property owners. All good sales people know their competition just as well as they know their own product. Not only does surveying your competition tell you what they have it also tells you how they are presenting it. If you call regarding renting an apartment from your competitor and the person answering the phone is friendly and inviting you will get that same impression of the property. If you arrive at a property and the property manager greats you in a robe, bedroom slipper with her hair in rollers and a cigarette hanging out of her month, what will be the impression you will have of the property. If you are really impressed with how the property manager handles themselves, you may want to target them to become your property manager once you have a property.
Review any documentary information that you find available. This is when I start reading the Police Blotters, the City council meeting notes, advertisements, any tax information, and any other government reports that are available. There is an infinite source of information out there and now the internet has made it readily available to you. Imagine if you had to go to the library and look all this information up in person.
Talk to tenants of your property, the competitor’s property and different retailers in the area. I always broach the person with, “Hi, I am looking to relocate to the area and was wondering if you could tell me what your experience has been with…”
One time I was inspecting a property and a contractor was working on site. The broker had told me that the area was safe and was being redeveloped. There was a building that obviously was involved in a fire. I asked “Do you know what happened with that building?” From that one question I learned that it had been “torched” by the squatters when the police came in to tell them to leave and that the contractor’s feeling was that it should be demoed and turned into a playground since the kids couldn’t walk to the local park with out being hassled by drug dealers or muggers. Maybe the broker just had a different opinion of what “safe” was.
You can hire people to shop your competition and the property you are interested in. This way the tenants don’t feel like you betrayed them or were deceitful if you end up owning the property. I use shoppers today on the properties that I own. This way I know that my managers are answering the phones the way that I want them to and that they are giving a good first impression to potential tenants.
Step #6: Do Your Homework
After you have researched the area, determined your supply and demand, checked out the market, the demographics, the vacancy, the competition, etc; now it is time to verify the feasibility of your plan. The first thing you want to look at is:
Is it physically feasible? If you decide that your apartment with all one bedrooms needs to be converted to two bedroom units, is it physically feasible. Can you easily put up a dividing wall or do you have to combine two units into one? If you have extra land attached to a strip center and your upside potential comes from developing the land, can you develop the land or would the expansion not fit into zoning restrictions. Wanting to do something and physically being able to do something are not always the same. Just look at how many professional athletes have come out of retirement only to have a career ending injury in the first game back or worse yet in practice never making to game day.
Is it marketable? When I think of marketability I always think to those igloo style round houses that were built in the 70’s. I think some of them are still for sale from the day the construction was completed. Most people are not interested in round dome houses. You have to make sure you take into consideration what society finds a appropriate not just look to our own interests.
Lastly, I verify if it is economically feasible and sound. If it will cost me $3,000,000 to renovate a strip center and the purchase price is $2,000,000; and the maximum value at 100% occupancy will only be $2,000,000, this transaction is not economically sound. Likewise, if I am looking to build 100 new apartment units but they do not generate enough income to support the debt, I need to find out if I can build enough units to support the debt while still staying within the city zoning requirements. If this can be done then I have now made the project economically feasible.
Step #7: Plan For The Market
The seventh step I do when conducting Market Analysis is to make sure that I design or plan for the market. I make sure that I give the property the correct curb appeal, that I offer appropriate amenities for the tenant mix, that people feel safe and secure when they are at the site. What ever issues or negativity that the property has that I am trying to mitigate, I want to make sure these match the market. For example, if my tenant mix is mostly elderly, my dollars would be better spent on a bus that could transport the tenants to the grocery store, medical campus, etc then on installing a new exercise room.
Also, if you spend all your money on the inside but do nothing to the outside, chances are no one will ever make it inside to see how you spent your money because the outside is not warm and inviting.
If you follow these seven steps when determining what market to invest in, I am sure that your chances of success will be far greater than if you just go by the seat of your pants.
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