How (& Why) to Enter a New Real Estate Market as an Investor
Whether or not you need to enter a new real estate market is a question most real estate investors tend to ask themselves at one time or another. It is also a point debated at length at conferences where the so-called successful people walk around power dressed in suits and ties and dole out advice that has little connection with the realities that most people have to deal with every day. This also came up as a question on a panel that I was a part of, and I’d like to share what I think about it.
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For one, shifting to new states or countries for better business is a good idea, but not all the time. In fact, I’d like to say this — entering a new real estate market is a very important decision, and it’s one that’s full of sometimes-not-so-easy-to-determine variables and plenty of risk. However, you can easily take that decision if you consider these two factors. First is understanding WHY exactly you want to enter the new market. Second (and more important), you need to know HOW you can enter that market.
The Right Reason
Coming to the first point, before you decide to enter a new market, understand what the right reasons are for entering a new market and whether your personal reasons match this, too. Never doubt about the fact that this decision is not only a risky venture, but also that it takes time to set up your presence in a new country or state.
Also, if you’re not going to be physically present there all the time, it will be harder to keep control of your new regions and, of course, harder to start making profits. Setting up at a new place also means that your old networks have little to no value, and you’d have to start rebuilding your personal connections right from the start. So I’d suggest that you think really hard before you enter the new markets. Ask yourself these questions.
#1: Are you doing well in your existing market?
If you are a good buy, fix and flip investor, for example, but not a huge company yet, you could start feeling you’re in a crowded market. But in reality, you don’t really need to go enter a new market. Even though the market may appear small or saturated, there’s always someone selling or buying, and there’s room for expansion. You just have to find it.
In fact, entering new markets may reduce the profits of the current one and pressure you to spread yourself thin. And if you think about it, if you’re not even able to expand your business in your own familiar market, how can you be sure you can do it in a market your barely know?
#2: Are you a good negotiator?
If you are a good negotiator, then I feel that whichever country in the world you may be in, you will always be able to make a good profit. This again means that you don’t need to shift. You would always be able to identify a distressed property like I could and turn it into something that can make you a profit. You wouldn’t really need to go out of your strong zone looking into new markets. Find undervalued properties, renovate, and make a profit selling them. No matter how hot your market is, there are always undervalued deals to be had.
#3: Is the market size the only thing that drives your decision?
While it may feel that your existing market has become small or overheated, the truth of the matter is that there are always going to be good deals. This means that you can keep making money no matter what. If not on the “selling” side, then surely on the “buying” side of the market.
- If you’ve answered yes to the above three questions, it may be a smarter idea to continue working in your current market. However, if you’re expanding because of other reasons, a new market is definitely a great choice. For example:
- If you are looking for cash flow — and most of you with a growth mindset should — then you can reap good returns in new markets. You should look at new markets, but first, strengthen your presence in the existing ones.
- A very strong competitor presence that is eating into your market share could also drive your decision. While competition may influence your decision, remember that it would be there wherever you go, so choose a new market with care.
- Finally, if you are not able to carve your niche or have personal reasons for looking at other markets, then a new market may be just the place for you. It may give you the wiggle room you need to actually get somewhere.
Once we’ve sorted out the “why” aspect of entering a new real estate market and you’re sure that you want to venture into a new market, then here’s how to go about it.
4 Steps to Enter a New Real Estate Market
Build a great team.
Before you focus on anything else, focus on the people first. A good and well organized team is always an asset when it comes to entering a new real estate market. So, make sure that you have great people on the ground first. Bring in a team that is efficient, can effectively work together, and helps you reach goals faster. Search for local expertise and experience across levels so that you have a good mix and a decent structure.
Also, ensure that you have team members you can trust. This becomes even more important when entering new markets in different states or countries, as you may not physically be able to afford your presence in the locations all the time. That would mean that your business would totally rely on the team you hire.
Look at the numbers.
A thorough market research is of extreme importance, and you need to look at the best possible return on investment (ROI) you’d get there. Do not make any decision before looking at the numbers, and always make sure that you have a 3:1 ratio when it comes to profits in the new market as compared to your own backyard. This means that your returns should always be three times better than the investments for you to even start considering the new market.
So if your local market gives you a cap rate of 4%, entering a new market should give you a cap rate of 12%. Only when the numbers add up can you make the decision of stepping into that new market — whether it is in another state or even another country. I would also recommend that you cross-analyze a few different markets and look at various neighborhoods before deciding on where to invest.
A good plan is half the battle won. Make sure that you have a blueprint in hand as to how you want to go about the new market. Plan your finances in advance, too, and make absolutely sure you know where the funds are going to come from. You wouldn’t want to go bankrupt in a new business at a new place. Be prepared with thorough market research to understand the market you’re about to invest in. You may even opt to start small or identify distressed properties if you have experience with them. Study the neighborhoods and buying habits, and network with as many people along your value chain as you can.
When you enter a new market, don’t do it without your safety gloves on. Watch out for shady operators and steer clear of them. Also, understand market trends and be prepared for what may go wrong. Illegal practices and shady people are the ones who will usually bring you down, ensuring that you wouldn’t profit even if there’s scope to do so. They are the ones who will pump up numbers, making them appear much better than they actually are. This would translate to the operators making money, while you lose out in the long run. So be prepared for what loopholes may come your way, especially before entering a new market.
So as you can see now, if you are an established real estate investor, a new market shouldn’t be too tough for you. However, that will hold true only for as long as you implement what you’ve learned from your past experiences and be willing to learn as you grow.
So, before you enter a new real estate market, focus on two decisions. First, be clear on why you want to enter the new market and do so only if you have strong reasons. Once you decide to enter, choose the new territory carefully. This would involve a thorough market research and comparative analysis by looking at the numbers. But before you do that, look at the team, too. Having a good team in place will make your job much easier. Finally, stay wary of shady characters who may siphon off your profits, making you lose out in the long run. With all these aspects in place, you are ready to make profits in your new markets, too.
So what are you waiting for now? Don’t just sit there thinking and wasting your time. Go get some action in the real estate life!
Investors: Would you consider branching out into new markets? Why or why not?
Let me know with a comment!