Building Your Buyers Box for Rental Property Acquisitions

Episode Sumary

There are three areas you must understand up front to successfully build your buyers box for making acquisitions of rental properties. Miss just one and your efforts will twist in the wind...

  • Utilize submarkets
  • Understand the value of knowing educational attainment
  • Submarket preselection is imperative

Episode Transcript

Hi it's John. Today's episode is Building Your Buyers Box for Rental Property Acquisitions. We're going to go straight out of the box and share with you the salient points of today's discussion.

[00:00:15] The first would be; where do you find performance that converts with respect to funds from operations or NOI (Net Operating Income)? Where do you find that? And the answer is you find it within submarkets. Not necessarily within a metropolitan or a region but it's always within submarkets and dissecting those submarkets that are working best.

[00:00:38] The second takeaway is; what is the key demographic component to forecasting rent growth? Rent growth is a key component in determining future value. And the answer to that is educational attainment; recognizing the educational attainment of the existing resident base within submarkets tells you a lot about the direction of change including the direction of change in rent growth going forward.

[00:01:11] And finally, how do you prepare your acquisition strategy for economic shifts in submarkets, for economic shifts in neighborhoods? And the answer is submarket pre-selection. Meaning we want quality and detailed demographic profiling that's focused on the shifts in population and the shifts in income within the submarkets that we're focusing on.

[00:01:37] So those three things being said you can say that this episode is going to go straight into the fire with respect to building your buyers box for making acquisitions of rental properties.

  • Utilize submarkets
  • Understand the value of knowing educational attainment
  • Submarket preselection is imperative

[00:01:50] Hey, and I just want you guys to know that this is probably one of the most densely populated podcasts that I've recorded. It has a number of list in here that you can utilize. So please do look at the show notes and maybe cut, copy and print.  It's more than just 123/ABC on this one. We've got a lot of bullet points to cover. And I think you'll be very happy to have them at your disposal.

My latest book, Rent Roll Triangle  is now available for pre-sale on Amazon.  In book stores in May 2018.

[00:02:22] When you're building your buyers box there's four areas that are necessary for you to have covered, and covered well, to be able to proceed and make sure that you're in good order.

[00:02:44] The first is recognizing the speed of due diligence and it's not done anything but get faster and faster as time has gone on. It's never slowed, if anything, it's just beyond belief in reference to what is required of investors just to tie up a deal. A quote from Richard West from CBRE, and this is from a few years ago, with respect to the speed of due diligence, states as follows;

"as the number of potential buyers increases, so does the market demand for fast go-hard decisions. We are seeing timelines as short as five to seven days for a buyer to either complete their due diligence or waive contingencies".

[00:03:31] And that's not any different today than it was when Mr. West shared that. The speed of due diligence is rapid-fire and it requires of you to be prepared even before you make the offer to recognize that your due diligence timeline is very very short. And that just folds into real life as we have it today, right?

[00:03:53] Technology and smartphones and body wear, they're all changing at a pace that's even faster than they've been- less than every 18 months. Advertising mediums such as Craigslist requires constant due diligence if you're going to stay on page one. Acquisitions due diligence is the same. Multifamily turns are the same: you don't get a week or two to turn a unit anymore you get a day or two if you're in a high flying market because the demand is there and if a 24-hour crew is required to get a unit ready then that's what we do to get the unit ready for the next person so that we can capture that revenue. Preparedness is a big part of having your buyers box; being prepared for being out there in the world and doing acquisitions.

[00:04:41] The next item is to recognize that there's always a correlation between office rents and multifamily rents. It doesn't matter if it's a small or large market. You can select by zip code or by submarket. There's always a correlation between asking rents for office space and asking rents for multifamily.

[00:05:05] It doesn't matter if the market is large or small- you'll always be able to ascertain a correlation between those two (office and multifamily rents). You can do it certainly by miles or by submarkets. But whether you are in a suburban market or a CBD (commercial business district), it's often very easy to make the correlation between those asking rents for office space and asking rents for multi-family. So, if you have that work done prior to making your offers then you've really accomplished a lot in reference to the due diligence phase because you don't have to do that work in the short amount of time that you have to accomplish the more serious financial due diligence on the property itself.

[00:05:55] Next is to recognize changes in neighborhoods and demographics. Changes in neighborhoods can occur in as short as a two-year time span. They (demographic changes) can really move (or change) from one type of neighborhood to another type of neighborhood rapidly.

[00:06:10] We want to really focus on submarkets here. Because submarkets is where the money is. Here is a quote from an article, titled “Submarkets Matter!” that was in Real Estate Finance in the year 2000, but it's still just as true today as it was then:

…within a study of 50 metropolitan area markets, it was recognized that between 40 and 50 percent of a property's overall performance could be explained by submarket factors while only about 10 percent of the performance could be explained by metropolitan factors.

That's just another way of saying that submarkets matter and they matter a lot.  A submarket is nothing more than the boundary that defines where a property competes and where the comparisons for properties begin.

If you've listened to this podcast you’ve heard me say that there's a difference between comparative assets versus competitive assets. And just because assets are comparative doesn't mean that they necessarily compete head-to-head. It's a salient point but one that I ask you to recognize and take to heart so that you don't waste time just looking at comparative assets just because they look the same if they're not competing against an asset that you have an interest in.

  • Recognize the required speed in due diligence
  • Recognize the correlation between office rents and multifamily rents
  • Recognize changes in neighborhoods and demographics
  • Submarkets Matter

[00:07:37] With respect to submarkets, can you answer these questions about your portfolio?

  • Are you aware of the average age of the resident base?
  • With their average income is?
  • Household size?
  • What is the primary cultural norm? (Said plainly; can your property manager communicate with your resident base without an interpreter? Is your PM appropriately staffed?).

If you know the answers those questions then you probably have a pretty good feel for the submarket that you're operating in. That puts you far ahead of most people that just make the presumption that they know versus actually knowing.

When you're seeking submarket layers or information about submarkets, there are certain factors to consider when analyzing the demand side of the equation. I'll just give you a few of them here. One would be household growth, units in the pipeline, that's another way of saying anticipated absorption, vacancy rate, sub-standard housing conditions, recognizing information about turnover affordability, Housing Choice Vouchers, market saturation, proposed rents (or what we call gross potential rents. Those are some of the things that are very important to be aware of when you're selecting some markets for your acquisition strategy.

[00:09:00] Let me share with you five submarket yield determinants. If you know these five things Then you know more about the submarket than most people. If you know more about the submarkets then you are in a better position to fold that information into your buyers box when looking at acquisitions. Submarket questions:  

  • Do you know the own versus rent percentage? what percentage of the population within the submarket owns their own home versus the percentage that rents there.
  • If you already have units within the submarket it's important to know how many units you have as a percentage of the submarket. If you're looking at a submarket that has 5000 units and you own 50 you know that you own 1 percent of the sub market. If you're looking at other acquisitions in that same submarket recognize that buying another 50 is not going to give you control of rents or a necessarily high impact ownership position within that submarket even though you're increasing your stake.
  • Do you know the current vacancy factor in the submarket?
  • Do you know forward absorption levels, how much new product coming online and when?
  • Do you know unit distribution or unit mix? Because we want our demographics that are in place to match the unit mix that is in place.

The best example I can give you is if a submarket is aging, in other words, the population there is aging, then 3 bedroom units are not going to be in high demand as the population ages. But if there's a change in this submarket, if more families are moving in, then those three bedroom units will be in very high demand whereas one bedrooms will diminish in demand.

[00:10:55] We're talking about, in this episode, about building your buyers box, most of us that are in this business are in the business to generate a yield and preferably a superior yield. You do that when you're building your buyers box for rental property acquisitions by paying a lot of attention to submarket selection even before you start looking at deals so that you've selected your submarkets before you begin to look at deal flow. That will save you a tremendous amount of time and headaches and make for better quality decisions over the long-term.

[00:11:33] Thanks for listening today. This has been John Wilhoit on Real Estate.

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