Defining Your Market
Hi,
I wasn't able to find this topic in a previous thread, so I thought starting a new discussion might work. I was wondering what thoughts there are for defining a market. I am from a relatively rural area, so it seems the methods that would be used in suburbs of larger cities, or areas like Cali, with high population density might not be applicable.
In my area neighborhoods are generally viewed as a development that was created when a farm was purchased and divided up, so the number of properties available is limited from "neighborhood to neighborhood".
For a new investor, initially focusing on buy and hold. Is it more important to be near my own residence, potentially limiting supply, or would it be more advantageous to cast a wider net, realizing the management becomes more challenging? Or, like in everything else, does it depend? :-) Thoughts/ideas are appreciated.
Thanks all,
Ben
Maybe a slightly wider net, but still close, if that makes sense.
In my case, for example, my rentals are all within a 15 minute radius of each other. But the center of that area is about 40 minutes from my actual house. I have rental houses in the area where I spent most of my younger adult years, the Monadnock region of New Hampshire. So I am very familiar and comfortable with it.
Quite recently, I moved about 20 miles east, to a somewhat more upscale town that is the suburb of the state's largest "city." I did that mostly because of convenience for my wife and proximity to the airport.
So I'm invested in an area I know well (and intend to retire to, actually) and that is even after my move close enough to visit very frequently.
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Besides driving neighborhoods, connecting with a local agent, scouring zillow, attending meetings and meeting locals what else would you recommend to someone jut coming to a new market. I am from the Midwest and have moved around quite a bit being in the military. I just recently moved to the New England area and the houses here a very different from what I have been exposed to. I will be here for about 5 - 6 years and I am just trying to start investing...looking for multi 3-4 plex in the so. NH middle MA area. Thanks for the post!
Richard C. Thanks for the reply. Definitely must keep relation of properties to one another in mind.
Originally posted by @John McConnell:Besides driving neighborhoods, connecting with a local agent, scouring zillow, attending meetings and meeting locals what else would you recommend to someone jut coming to a new market. I am from the Midwest and have moved around quite a bit being in the military. I just recently moved to the New England area and the houses here a very different from what I have been exposed to. I will be here for about 5 - 6 years and I am just trying to start investing...looking for multi 3-4 plex in the so. NH middle MA area. Thanks for the post!
Driving neighborhoods to get a feel for them can be difficult for people from other regions of the country, as it sounds like you have realized. A 150-year-old wood frame house that would be a teardown in most of the South or a $40k class C rental in the Midwest might be a very desirable house worth hundreds of thousands. Also, most of New England grew pretty organically, and not in a planned way. So it is not at all unusual to find a million dollar house a couple hundred yards down the same road as a rotting trailer. There aren't a lot of large planned sudivisions.
I've never attended a REIA meeting, so I have no idea of their value.
Zillow's accuracy issues are well known, but because of low sales volume in rural NH, I think they may be especially bad here. I routinely see values off by 50%, and rent "zestimates" wrong by 25%. So be careful there.
Reasonably modern purpose-built fourplexes like you see in much of the country are very rare. Wood triple deckers are common in Manchester, slightly less so in Nashua and other towns.
The biggest variable in values, in my experience, is the quality of the school district. This can vary wildly in neighboring towns that look superficially similar.
A good general rule of thumb in old mill towns in NH or Central Mass (which is where I grew up, there and Boston.) There is usually a river. That is where the mills (and jobs) were. Worker housing was down near the river, close to the work but also the heat and general unpleasantness. Higher classes lived on the surrounding hills, since they didn't have to walk to work and that way they caught the breezes. If you're in a mill town in New England and want to find the nicer neighborhoods, walk uphill.
If I were looking for a multi in NH now (which I am not) and did not want to deal with Manchester, I would be looking hard in Milford, the town immediately to Nashua's west. Solid demographics, good but not outstanding school system, decent value available. Get an agent there, and start reading the listings, and I think you may find what you are looking for.
I use a variation of Richard's approach in that my units are all 15 minutes or less from my house but might be further from each other (i.e. going in different directions). I self-manage, and it is important to be able to get to any of my places quickly - I'm more apt to do drive bys, and it's easier for me to get to for general maintenance and repair. This might sound goofy to some people, but I don't buy anything that's further than 10 minutes from a good hardware store (Lowes, Home Depot, Ace, whatever). If I'm fixing something and need a part, I don't want to have to truck 30 minutes to wherever to get it. This also means that I hold properties that are in reasonably urban areas, which meet some other criteria I use to judge whether to buy something (school district, proximity to jobs/shopping, etc).
I think for a first-time investor, you are best off sticking to neighborhoods you know. If you don't know any neighborhoods, you should get to know them before you sink any money into anything. This is true whether you self-manage or pay a PM company. If you are going to direct your funds into real estate areas that you know nothing about, there are other (and I think better) ways to do it than direct buy and hold properties.
Thanks, JD. That's good advice; I especially like the bit about proximity to hardware stores. I never would have thought about that. I just want to be wise in finding the right balance, between distance and volume/competition, which is a challenge in rural areas.
I do not intend to self-manage (at least in the medium to long term). From the responses that I have received, it seems that my initial take on this topic was correct. The size of the market is less important than knowing what it is, and fully the market's nuances. The size can be allowed to grow later; putting in the work to understanding the market and how it fits into the BP is the most vital part of this decision at the outset.
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Interesting. Thank you Richard and Jd for your insight. Yes looking for a house hack multi in my area is definately a little challenging. I will check out Milford for sure. Right now I have been looking in Nashua and Hudson. Visually looking just south of Nashua as I drive the country back roads back and forth to Devens everyday. Lots of nice SFH along my route and a couple that look like potentially good investments (tall grass and generally neglected houses in nice rural area next to decent schools). The REIA groups, especially the black diamonds group, have been very helpful and I have met some really great people so far. Learned all about esbestos last night in Worcester from a seasoned lawyer who deals specifically with that subject all over MA/NH. I have a great agent here in Nashua who has me linked into the MLS listings directly... I am venturing to guess that my best values will not be found there. Seems like the housing market in general is going up gradually around here too. I have also been checking for HUD and pre/foreclosures trying to get a repeatable criteria and process for evaluating properties here. Thanks so much!
Ben this is a tough question to answer without the yucky cop-out response of "depends". I have just completed my own market expansion analysis and I'm actively shopping in a brand new market just over an hour out of my core area. I agree with Richard, I would strive hard to stay close to home, especially as a newbie.
However, you've got to balance that against 1. Inventory 2. Opportunity and 3. Risk (#1 is most paramount, R & O are tied).
Inventory - Without inventory you have no business. But note that the MLS is not the only inventory out there. Zillow has "make me move" and every investment property owner has a price, and residential owners are not out of bounds either. But if you are so rural that there is not real inventory you must expand your criteria, simple as that.
R & O -
Opportunity is the combo of inventory and the financials in that market, ie prices vs rents, cap rates etc. As you expand your target market run the numbers on perspective properties using craigslist intel on rent rates, rent-o-meter and zillow also provide data points for rents on specific properties. Run numbers on a couple properties, boom now you have pro-forma type analysis on a market.
Risk is your evaluation of all that can go wrong. Tough to figure out but how far from home is it and how bad can that hurt you? You may need an entirely new team of contractors, prop managers and agents. That newness can cost you money and aggravation and that is RISK! Is the place close enough that you could beg a contractor you trust to hook you up "just this once" if your in a bind and drive an hour or two away for a small "bonus"? That's a way to mitigate risk. Important - the real risk is how well do you trust that pro-forma type analysis you did?! If your super wrong you could be super screwed! If you grew up in an area or spent a lot of time in your secondary market like Richard you know your numbers and mkt conditions instinctively. But a new market is a new world and you need to mitigate risk by pulsing experts, agents, investors, business owners, renters in an area to vet your analysis as much as possible, and use online resources to check crime rates, school system strength, foreclosure frequency etc. Nail down solid risk and opportunity analysis on several expansion markets and compare, decide and then attack! Trust your analysis and go take the hill.
But remember, there is a REASON direct mailers campaign to out of State landlords! The greater the distance the greater the opportunity for risk and misery - IF you don't do your homework.
Keep up the good homework you've started here.
Good luck.
Thanks, Brett. That is very informative answer, that confirms my thoughts. The numbers of a market will determine feasibility. Start local and branch accordingly to make the numbers work. I appreciate the encouragement.