How to go about knowing my Market??

[Cornelius Dabney]

Hello everyone, Since I have been on this site , I've been hearing one of the important things to do when starting out is to know your Market. My question is what does that mean exactly. Am I suppose to compare mortgage rates in the city area I'm buying in and do I have to compare monthly rent amounts in that area as well since I'm looking to become a landlord?? How do I found what the cap rate, what's a good or bad deal, how not to over spend for rehabbing??? So many questions can someone give me some insight?? Thanks, Cornelius

[Vince Rosario]

If you concern yourself with cap rates then what's most important is WHY you have the cape rate you do. Cap rates are simply ratios that compare operating efficiency (NOI) to comparable sales, stated as a rate. As long as you understand the economic environment in which you operate, then cap rates can be useful tool for quick screening. What this calculation doesn't tell you, which in my opinion is most important, is the opportunity or future potential a particular property has over others. Cap rates are also used for valuation, but let's face it, valuations are purely ASSUMPTIONS. You have to then ask yourself if your assumptions about the future are in-line with others. If not, an opportunity may exist.

Mortgage rates are pretty much out of your control and are influenced by the supply/demand for MBS or other other long-term debt. It's also influenced by the federal reserves interest rate policy so you just have to go with whatever the market gives you or just work around it. Mortgage interest has nothing to do with operating efficiency anyway, it only impacts your cash and overall debt load. What's most important for income producing properties is operating efficiency. This is the value and potential your property has over others and you can expect a high price for it if you choose to sell.

Anyway, back to your question. This idea of knowing your market is really a two tier approach, both on a macro and micro level. On the macro level, we look at government policies and if they are conducive to growth in real property ownership. We also look at the business cycle, which is driven by employment, fiscal policy (govt spending) and monetary policy (cost of capital, basically interest rates). On the micro level you can look at similar things within your state: employment, education, industry, wages, crime, population and development. Notice that by keeping up with market rents, which is essential to knowing your market, you are essentially gauging the growth/decline in trends for all of the points previously mentioned. In other words, employment, education, industry, wages, crime, population and development directly cause rise/decline in rental income. You can track rental income to ensure it's in-line with other properties so to avoid opportunity costs, but the bigger more important question is whether or not rental income will continue to rise. This question is at the heart of market analysis.