Today’s topic is defining local market knowledge for buying real estate. Our topic includes four areas related to establishing local market knowledge:
[00:00:05] The reason this topic is important is because this is no place to get cocky. We all have a place (metropolitan, city county or state) that we know better than any other place. And for many of us we think we know it better than anyone else. But that’s not necessarily true.
[00:00:21] I want you to step back and think about the topics we’re discussing today within the local market knowledge and make sure that you have a grasp of the topical areas and that you can apply them to your real estate holdings and to your acquisition strategy. Whether you’re buying duplexes or $20 million-dollar office buildings thinking that you know the local market is not the same as knowing that you know the local market.
[00:00:48] The markers that I’m presenting today are for your consideration to make sure that you’re covering all your bases with respect to knowing the markets that you are putting dollars into. As many of you heard me say before, very often, I understand, that the dollars going into these deals is your money. Because it’s your money you should have a great amount of interest in where it’s going.
[00:01:14] The tools that I represent, and tools that I try to present to my audience, are those that they can use on the back of an envelope to make those initial cuts before you dive deeper into the real analysis of the deal.
[00:01:29] If you’re short circuiting even on local market knowledge then you’re already in trouble. If you’re going into (due diligence) with the attitude that no one knows more than me that usually means we’re going in with a blind spot because we think we know more than everybody else. I’m sure there are occasions where that’s true but often it’s not true and we need to know what it is we’re getting into.
[00:01:59] With respect to real estate investing it’s a long term hold in many instances. Yes, there’s people books that buy and flip but for most of us that buy real estate it’s a buy and hold strategy and that buy and hold and be five to 15 years. The decisions we make on the buy side and the markets that we decide to buy into they are ultra-important and should not be taken lightly. Let’s dive into learning more about local market knowledge.
[00:02:33] Think about the first property that you ever purchased. Just think about that her moment. Capture that property in your mind’s eye. Think about if you can remember the address. Do you remember the square feet; do you remember the street? Do you remember what it cost? It could have been a long time ago. Think about the very first property you ever purchase. The decision point probably didn’t have a whole lot to do with anything more than you needed a piece of property. And this is the one that you chose.
[00:03:10] Now there may have been more that went into the decision at that point but the likelihood that you determined that you needed to know as much as you do now is not very likely. As we get older and wiser we add knowledge and wisdom and we add further points that we need to review along the investment decision line to make sure we’re making a quality decision.
[00:03:34] Think back to that very first property that purchased even then you probably looked to the left and right across the street to see a little bit about the age and condition of adjacent properties. That may have been the full extent of your local market knowledge. You may have known were local shopping was as compared to where that property was but not much else. And when you consider that stanza as compared to how you would look at an asset today, with your increased knowledge, skills and ability to be able to analyze an asset it’s probably rather embarrassing. But we all must start somewhere, right.
[00:04:18] If you’re starting today and this is your first property that you’re about to go and buy. I would submit to you that the best thing that you can do is get an understanding of the local market and use the information that we’re presented today as a baseline for collecting that information because you’ll be able to use it for the entire rest of your career as you build further knowledge and skill in making investment decisions.
[00:04:46] Today’s episode is on defining local market knowledge. We all have knowledge, we’re all local to a place. But having local market knowledge is more than just knowing who owns what or who’s selling. We must review the assets, real estate assets, particularly if we’re looking to purchase them, from a local market knowledge perspective that includes not just the physical asset but the property around the physical asset. Making a delineation or a distinction between a competitive asset versus a comparative asset.
[00:05:21] Knowledge about the local market also includes understanding and defining submarkets so that the people that live-in work and within proximity to one asset. We recognize that they are different than the people that live-in work close to another asset. So how deep is your local market knowledge? There’s four different categories that I’d like you to consider for defining or understanding your level of local market knowledge.
[00:05:51] The first is understanding and knowing about the subject asset that are looking at as a potential acquisition candidate, or as an owner. What is your perspective? Is it as a potential buyer or are you already in that market and do you know everything you should know about your very own asset? Knowing about your asset is more than just knowing about the sticks and bricks that you own. Part of it is understanding the assets that are adjacent to the site (that are adjacent to the asset that you own). Those properties that share a lot line with the subject property. What you know about how those assets are owned, run and managed?
[00:06:35] That sometimes presents opportunity. If f there’s three golden assets in a row and then one next to those that is bringing the entire neighborhood down maybe there’s an opportunity for purchase. Perhaps the owner can’t keep up the asset and maybe they have an interest in selling which would allow you the opportunity to bring the fourth asset up to that gold standard and have a positive impact on not only your existing investment but the entire neighborhood. The subject the asset, you need to know about that, and adjacent assets- those that touch your property.
[00:07:14] From there we go to the submarket which is an area represented by certain natural and competitive trade area boundaries. Dallas has 36 to 38 submarkets depending on who you’re talking to, and they all have very well defined boundaries. Submarkets are represented by more than just boundaries based on streets and parks. Demographics come into play with respect to submarkets; income, household size, things such as that.
[00:07:44] Then there’s the market- the represented city or metropolitan area that overlays the submarket and the street and the subject property.
[00:07:54] Those are the four areas that I’m asking you to consider and referenced your local market knowledge. Do you understand the asset that you either own or are thinking of owning? Do you understand the adjacent assets? Do you understand the submarkets and the market?
[00:08:10] With the subject asset we’re talking about the physical and financial dynamics that the asset represents. With respect to the adjacent assets we’re talking about not only just what they look like but who owns them who manages them.
[00:08:24] Are they a potential acquisition candidate in addition to the opportunity that you either owned or looking to own. And what’s the age and condition and occupancy of these (adjacent) assets. Not just the one you are looking to but those that are surrounding the asset that is in your sights or the one that you already own.
[00:08:47] With respect to submarket, once assessed you should have a solid view of the population, the household income and the competitive properties affecting a given asset that you are looking at. We can tell you that seldom are submarkets square or round- they come in all different shapes. They don’t necessarily follow census tracks or block routes but submarkets are real. They do have a shape and size and they cover sometimes a very large area.
[00:09:18] If a submarket is large or small it generally acts the same throughout. So, rents will be the same for the same type of property given that the quality is the same. When you’re looking at submarkets consider that they are a geographic area defined by streets, natural barriers and the specific properties in which a property is competing for customers. And that’s where we make that delineation between comparative assets versus competitive assets. It could be two assets that are right next to each other in the very same submarket but they do not necessarily compete with the same customer. And that’s where you must make that further distinction in your local market knowledge.
[00:10:07] Do you understand the difference between these and can you segregate that so that your decision making is based on the right level of knowledge or data points? In this case, we’re talking about your specific knowledge about being able to determine or discern the difference between a comparative versus a competitive asset.
[00:10:32] That’s so very important. Because with that local market knowledge and understanding the difference between comparative versus competitive assets, you won’t be in a perpetual loop of confusion. With confusion, the answer is always no. It doesn’t matter what the question is. It doesn’t matter what the property is, if there’s a high level of confusion the answer is always no. No that’s not a good asset to own. No that’s not the place to buy because we don’t understand.
[00:11:01] When you increase your local market knowledge, when you have a greater understanding of how things work within that area, then you have a much clearer focal point for making decisions; when you understand the subject asset when you understand the adjacent assets and when you understand the sub market and its place within the market you are in a very good position for making decisions about properties- what to buy where to sell when to buy and when to sell.
[00:11:34] That’s why it’s so very important to have quality local market knowledge because it allows you to make quality decisions. Think of it beyond just the fact of you know where stuff is and think about applying your knowledge to every asset that you own or are considering owning within a market from a local market knowledge perspective and you’ll have an opportunity to make much higher quality decisions.
[00:12:02] Let’s recap. Understanding local market knowledge means that you have a grasp of the subject property. You also understand the adjacent assets- those that touch the property on all sides of the lot line. You understand the submarket and that the areas represent certain natural and competitive trading areas or boundaries. And then you have a grasp of the market in general. What the city represents, which way it’s growing, what’s occurring there, if jobs are coming in or that jobs are leaving. You understand what’s happening at the local level that will affect the value of the asset that you’re looking to purchase.
This has been John Wilhoit on Real Estate.
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John Wilhoit is a real estate professional specializing in residential asset management and property management. John has an undergraduate Degree in Business and a Master’s Degree in Urban Studies. Learn more about John here.