First deal - how to choose target market

7 Replies

Hi guys,

I'm making my way towards my first deal.

I live in Israel, and while there are people that feel that good deals can be found, the public opinion is that the local market is too expensive and lots of people even say that we have a RE bubble on our hands. 

my take is - regardless who is right, this is probably not the ideal market, so I've decided to invest abroad.

I had doubts regarding whether I should do my first deal through a RE investments company or go through it on my own.

currently, I feel it would be a better idea to use a RE investments company, because of the complexity and the amount of mistakes that can be done, but I can't make up my mind about where I should focus, each REI company is focused on a given market and they have all the arguments to explain why their market is the best and the rest are dangerous...

I've narrowed it down to two companies, one is focusing on northern England and the other in Spain, and like I said, each company is doing a great job explaining why their market has the most potential, I'm very confused... 

can you guys recommend how I should go about this? 

how can I make my own research of those markets ?

any other thoughts\advise will be great as well 


cheers,

Avi

Hi Avi,

Good to hear from your initiative. It's also interesting to learn what the situation is in Israel.

By RE investments company, do you mean REITS or crowdfunding-sort of companies?

Regardless of the market conditions, if you are investing overseas or if you don't have local expertise, the simplest option would be investing through REITS. These should be relatively liquid investments that may allow you a hassle-free exit whenever you decide. And they will provide you with a lot more diversification.

With regards to the current market situation in Spain, I don't think you'll ever get a black or white answer. As in financial markets, you'll probably have 50% of bullish investors and 50% of bearish investors.

An objective index I often use to get the feel of a market is the UBS Global Real Estate Bubble Index. It is available on-line free of charge.

If you want a short answer, considering this as my personal view only, I would say we are still in a seller's market, but I cannot see the recent asset valuations growth to last for too long. Once again, as in financial markets, we all know prices are going to stop growing at some point, but nobody knows exactly when the big fall in prices will begin. 

In fact, RE valuations are decreasing already in some areas, for example in some parts of Barcelona, and for certain RE asset types. I'm not saying you won't find good deals, but the margins are growing thinner and thinner...and some buyers are putting-off their decision to buy simply expecting a market correction.

Personally speaking, I have sold already a portion of my portfolio and I am cautious now, expecting for the market conditions to unfold and ready for the opportunities to come when asset prices go back to a "healthier" level. 

Regardless of what I'm saying, the most important thing would be for you to consider what is the minimum ROI you'd consider as acceptable and, if you find deals or companies offering a decent return ,and within your risk tolerance limits, go for it.

 

Hi @Avi Levi , the most important point is researching both markets using the real estate platforms out there and talking with separate individuals. Get to know what the potential is or how the markets behave, how fast they are, which models work, etc. A decision like you are about to make is also based on trust, because this company is going to manage your money in a project. Make sure that they are transparent and also make sure they include you in the process as it seems you have an urge of learning it yourself as well. 

In the end, to be honest, it doesn't really make that much of a difference what you are choosing. If you know what you are doing, or if you are collaborating with companies that know what they are doing, you can make money everywhere. 

Maybe a last practical point would be to ask yourself where you would like to spend your time most visiting the projects. Visiting it is going to be essential to be seeing the progress yourself and letting the REI company know you are serious. In that sense, Spain would be a more attractive decision.

Regards!

@Javier De la Rosa @Erwin Groenendijk

Thanks a lot for your replies guys!

I'm not sure about the lingo, but by RE investments company I meant - companies\individual investors that helps in finding deals and managing the entire asset purchase process, including deals with local management companies etc.. 

I've never done market research before, i'd appreciate any guidance on the topic, how should I go about researching a RE market? I'm trying to understand what information should I look for and where?

"UBS Global Real Estate Bubble Index" reference was great

Thanks a lot for you help guys!

Hi @Avi Levi (and everyone),

I was in the same situation a few years ago when I started investing in real estate so it might help you out if I tell you a little bit about my story.

Firstly though, I always listen to others but I eventually make my own opinion based on facts. When it comes to a bubble, there are some clear signs, like when the price to rent ratio is way too high or when the average buyer cannot afford the average home or only can afford it at ultra low interest rates. If you look at it this way, you'll see that huge parts of North America and Europe are in the midst of a huge bubble of epic proportions. It is fuelled by ultra cheap credit most of the time and it explodes when interest rates significantly increase or when there is a recession that closes banks to significantly restrict credit. However, as you'll see in my story, you don't need to know for sure whether there is a bubble or not as you can just use your common sense.

I was living in Montreal, Canada, when I decided to start investing in real estate (and I still am) and the easiest place to invest is obviously your own backyard. Montreal is considered a stable market and so the CAP rate has been traditionally low, at around 5% (it's actually closer to 4.5 as the market gets hotter and hotter). I don't know about you but I don't wan to make a return of just 5% on my money. Especially since I could get a higher return at a click of a mouse by investing in a stock market index fund and without having to find a property, deal with tenants,.... Make a higher return in real estate at a constant 5% would be possible provided that rents would go up to generate more income and prices would go up to generate capital gains. In order for rents to go up, you need income and salaries to go up. In order for the value of multifamily real estate to go up, you need rents to go up and so you need again incomes and salaries to go up. And, in order for residential real estate value to go up, you need buyers to be able to afford a higher mortgage and, therefore, incomes and salaries need to go higher again. So, generally speaking, you need a continuous rise in income and salaries to have a sustainable growth in the value of properties and the income they generate. As you might now, incomes and salaries have been stagnating over the last decades in developed countries and there are no prospects of that changing any time soon, given the state of the economy. So you might ask why the value of properties has increased so much during that same period. The answer is simple: ultra low interest rates. They have allowed buyers to afford a higher mortgage without having to earn more money and renters to pay higher rents by going an a borrowing binge to finance their lifestyle. The problem is that we might be getting to the end of this game as interest rates can hardly get any lower and buyers and renters reach the top of their borrowing capacity. I therefore concluded that, on the one hand, the upside is limited, at least in the short to medium term. On the other hand, the downside is potentially big. Indeed, should interest rates increase significantly or should the banks restrict borrowing as a result of a(long overdue) recession, the market could drop and drop hugely. So we have here an investment with limited upside and a potentially big downside, which is exactly the opposite of what a great investment is: a potentially big upside and limited downside.

So I thought about ways to increase the profitability beyond the 5% cap rate. Of course, I cannot control the market-driven prices but I could try to get (significantly) more rents. Yes, rents are market-driven as well but I could get significantly higher income by doing short-term rentals. The problem is that, like more and more cities, Montreal has pretty much banned short-term rentals. And, even aside from that, the competition is getting cut-throat and it becomes less and less profitable. Cut-throat competition is the main problem in Montreal, as more and more buyers and investors are competing over and overbidding on a shrinking supply of properties (owners aren’t motivated to sell since prices are going up, which creates a bubblicious spiral in prices).

That is when I decided that I needed to go overseas to make some more serious money. Granted, you can make money in Montreal by buying unrenovated properties, raising the rents and refinance but you have to find a deal, it works in 1 building out of 200 and everybody wants to do the same so there is huge competition. This is definitely not good for passive investors.

I wanted to escape the markets with cheap money and cut-throat competition and I decided to do short-term rentals in locations where tourism is booming to get high rental income and where there is a path of progress for high capital gains. We are talking here about places like Mexico, Central America, the Carribean, South America and certain parts of Southern Europe. In these places, there are mostly no turnkey operators like those you have identified so I had no choice than doing it on my own. Thankfully, during my previous career as an international banker, I had been covering those regions and I got precious contacts with developers. After leaving that career, I traveled the world to identify the best markets and opportunities and using my existing network to create a unique network of real estate developers, agents, lawyers, builders, … for future use.

I had great connections on the Riviera Maya in Mexico, which was in the midst of an incredible economic and tourism boom, with a hotel occupancy rate of between 80% and 90% all year. I figured out that I could buy brand new luxury condos in pre-construction in an ideal location and make rental returns above 20%. That's more than 5 times Montreal's CAP rate. Granted, that's Montreal's CAP rate is for long-term rentals. If you compare short-term rentals between, Playa del Carmen and Montreal, the rental rates are much higher, the occupancy is much higher given that the season is much longer, the property prices are much lower and. While it's mostly illegal in Montreal, there's no chance of it becoming illegal in Playa del Carmen. Doing short-term rentals in Playa del Carmen sounded therefore like a no-brainer.

Montreal has one big advantage though: the availability of leverage through cheap mortgages, which Playa del Carmen doesn’t have so this reduces the advantage of Playa del Carmen. I thought that it didn’t make sense to go through the complications of investing overseas if I wasn’t gonna make a significantly enough higher return. So, I looked for a way to get leverage in Playa del Carmen as well. This is where my personal relationships with the best developers in the area can in handy, as they gave me deals that are only available to their close network. I could buy into new pre-construction condo projects before the project is launched at a big discount to the launch price and I could pay 50% of that discounted purchase price over a few years after the delivery of the condos. Given the very strong short-term rental market, I’d be strongly cash-flow positive even after debt service and so I was able to put much less than 50% down in a 100% cash market. I get access to private deals like that in several tourist hotspots across the world but there was a limit to what I could do with my own money.

Investors asked me if they could invest with me. I arrange the deals and do everything. They come up with the down payment and we own the property 50/50. They could wait for the launch of the project and buy a similar property and own 100% but they make a much higher return by investing with me rather than by themselves as they benefit from the combination of leverage and a lower purchase price. What is even better is that they are getting this much higher return by taking a much lower risk. Indeed, investing in overseas and in those countries, while potentially very profitable, can be very risky if you don’t have the right knowledge and connections. By investing with me, the investors benefit from my knowledge and connections, which significantly reduces their risk. I’m very risk averse and I’d never handed over any money to a Mexican developer if I didn’t know him personally or at least have somebody I trust who did. So that is my USP or unique selling proposition: my investors make more money, do less (nothing) and take less risks than if they were investing by themselves.

So there you have an example of both situations: me investing by myself and investors investing with me. Generally, you will make less money if you invest by yourself than through a turnkey provider but you will have nothing to do and you won’t need to acquire the knowledge if you invest with them. So, it’s a trade off. However, if, like me, these companies can give you a higher return and reduce your risk compared to you investing by yourself, it’d be a no-brainer to work with them. Their only drawback is if you want to be actively involved unless they take on active partners like me.

Finally, while this kind of investment is very profitable to my investors and myself, the developers in this type of country are making the most money and in a much shorter time frame. This is why I’m now working on two condo development deals, one in Puerto Vallarta and the other beachfront in the Dominican Republic. I can do this only because I have the necessary connections. As an ex-banker, I will do the finance part and deal with the future investors and my local partners will bring the experienced contractors and builders to carry the project. This is very profitable because we’ll sell in US dollars to foreigners or wealthy locals and our costs will be very low and incurred in the heavily depreciated local currency. Moreover, if we pre-sell a lot, we’ll be able to finance most of the project with our buyers’ prepayments, which is basically 0% financing. This means that our future investors will have to invest will be relatively limited and the combination of limited investment amount, big profit and 0% financing means big returns for our investors. We’re confident we’ll pre-sell a lot because we’re going to offer request a 50% down payment while the competition requires 100% so we’ll have a unique and better product. So, we should do very well with sales, especially if we find the right people to do our marketing. Even though the pre-sales should considerably reduce the risks of our investors, some of them might still prefer to not go into development. In that case, they’ll have the opportunity to be buyers and get a high investment return on their purchase given that they’ll only have to put 50% down. Basically, we’ll give them the same kind of deals as I got from my developer in Playa del Carmen and so I’ll have come full circle.

You can’t do this kind of development deals in Canada or in similar countries because all the buyer has to put down before the delivery of the condo is 5% of the purchase price. These are awesome deals but having the right knowledge and connections is an absolute necessary in order to be successful.

To conclude, I hope that this will help and inspire you. Don’t hesitate to contact me if you think I can help you further.



Originally posted by @Avi Levi :

Hi guys,

I'm making my way towards my first deal.

I live in Israel, and while there are people that feel that good deals can be found, the public opinion is that the local market is too expensive and lots of people even say that we have a RE bubble on our hands. 

my take is - regardless who is right, this is probably not the ideal market, so I've decided to invest abroad.

I had doubts regarding whether I should do my first deal through a RE investments company or go through it on my own.

currently, I feel it would be a better idea to use a RE investments company, because of the complexity and the amount of mistakes that can be done, but I can't make up my mind about where I should focus, each REI company is focused on a given market and they have all the arguments to explain why their market is the best and the rest are dangerous...

I've narrowed it down to two companies, one is focusing on northern England and the other in Spain, and like I said, each company is doing a great job explaining why their market has the most potential, I'm very confused... 

can you guys recommend how I should go about this? 

how can I make my own research of those markets ?

any other thoughts\advise will be great as well 

cheers,

Avi

Lots of folks look towards the turnkey markets. There are tons of turnkey markets out there. Many of these markets are very well represented by sellers & turnkey operators here on BiggerPockets. In no particular order I have listed some of the most popular markets for out of state investors

  • Cleveland, Ohio
  • Dayton, Ohio
  • Toledo, Ohio
  • Youngstown, Ohio
  • Cincinnati, Ohio
  • Memphis, Tennessee
  • Birmingham, Alabama
  • Kansas City, Missouri
  • Saint Louis, Missouri
  • Indianapolis, Indiana
  • Detroit, Michigan
  • Erie, Pennsylvania
  • Louisville, Kentucky
  • Milwaukee, Wisconsin
  • Jackson, Mississippi

Each of these markets is popular with turnkey investors because of the low barrier to entry, high rental demand & high rent to price ratio. I recommend setting up keyword alerts for each area as they are discussed in the forums daily with advertisements posted in the BiggerPockets marketplace hourly.

One thing to note when looking at the individual markets, you can make or loose money in any market. Don't think that one particular out of state market will shoot you to success or abject failure. It's not really that complicated to buy out of state. It only becomes complicated when investors try to over complicate or over think everything. Whenever you are buying a property out of state you should do a few things to ensure it's as smooth as possible.

  • Don't buy in the roughest neighborhood in the urban core. Pick a solid B-Class suburban area. Perhaps a nice 1950's built bungalow.
  • Always hire a 3rd party property inspector to give you an unbiased feel for the home. The reports are 40-90 pages long and go through the entire house in great detail.
  • Get an appraisal. If your using financing the bank requires this. This is good. The bank isn't going to let you blow their money. They have more skin in the game then you do.
  • Make sure you get clear title. If using a lender this is a non issue. They will make you do this. It's those maniacs that buy homes cash via quit claim deed off of craigslist that really get screwed.
  • Make sure your property manager is a licensed real estate brokerage.
  • Google Clayton Morris and/or Morris Invest for a cautionary tale of what not to do when buying turnkey real estate
  • Understand you can not eliminate all risk, only mitigate it. If you are risk adverse real estate, (especially out of state) is not for you.