This article is about helping you to identify and profit from uncommon competitive advantages in a local market or a small section of a larger market.
In business, like in sports, we are always seeking a competitive advantage (or edge) to help us win. When I played football at Clemson University, my edge was preparation. I watched more film, worked harder in the weightroom and conditioning, and practiced more consistently than most people around me.
In real estate, I like to think I’ve carried over that same edge of preparation — but when I started 12 years ago, I quickly learned that “real estate investing” is just too big of a sport to prepare for. I had to divide it into smaller pieces before I could really study it, improve my skills, and gain my edge. In other words, I had to get small before I could get big.
Gaining a Competitive Advantage By Getting Smaller
The smaller pieces of my competitive advantage started by defining my real estate niches. My niches have typically included fix-flips and turnarounds of distressed buy-and-hold rentals in quality locations. From there, I got smaller still by becoming very good at particular creative financing strategies. I have written a lot about my creative financing toolbox and why I prefer creative deal structuring. These have certainly created a competitive advantage because when I meet with sellers or private lenders, I have more options and expertise than many other people they talk to.
But there is still one more competitive advantage that also benefits from getting smaller. This advantage concerns WHERE I choose to invest. When you start investing, you’ll have to decide whether to go all over the country, all over a city or region encompassing one million people, or instead find little investing pockets within towns or neighborhoods of a larger region. I have chosen the last option.
In other words, I try to become a big fish in a small pond. The “pond” is my small local market or a slice of a bigger market. A “big fish” is just someone who knows that market really well and who “swims” around the entire market over and over until it becomes very familiar and cozy.
Remember, the competitive advantage I’m talking about is preparation and specific knowledge. The more you reduce your market’s size, the easier it is to study and profit from it.
There are plenty of bigger, more impressive fish in the open oceans who cover huge market areas (i.e. hedge funds, REITS, syndication investors). But huge fish are always hungry and can never stop moving. That’s not for me. A simple little pond or two will keep a small investor like me well fed, safe, and happy for the rest of my life. Plus, the shallow waters and small deals of my little ponds are often not even worth the time of the big fish.
The rest of this article will explore three uncommon ways to become an expert in your local market and to become a big fish in your own small pond (or multiple ponds). These uncommon methods include studying your local:
- Rental ordinances
- Comprehensive plan
- Zoning ordinances
#1 – Your Local Rental Ordinances
Many cities and towns decide to regulate rental properties by creating a rental ordinance. On the surface, we landlords might not like more restrictive rental laws, but like every problem, there is typically a hidden opportunity if you keep digging.
I am going to tell you a very specific example in my own market that I think will give you a more universal sense of the opportunity available if you know your local rental ordinances.
I live and invest in the small college town of Clemson, SC, which is dominated by Clemson University, which has 20,000 students. While most students live in apartments, in the past some students piled 3-5 friends into a house in a residential subdivision. The worst of these houses often hosted loud parties late at night, left trash everywhere, and constantly tore up yards with their cars. Neighbors continued to complain, and one year city council decided to put an end to the problem.
Our city council created a rental ordinance, which required all landlords in neighborhoods with single family or duplex zoning to have a yearly inspection by a city official and to pay $100 for a rental license. The inspection included a list of safety and cleanliness items, but most importantly, it also limited the number of unrelated occupants who could live together to only two people. This means three friends could not live together, even if the house had four bedrooms.
But there was a big exception to this ordinance. Anyone who licensed their rental at the time of this ordinance could grandfather in their occupancy status and still have three unrelated tenants instead of two. This grandfathered license could be inherited by someone who bought a property!
The opportunity here is that of grandfathered rental licenses. In my case, the ability to rent to one more student could represent a real increase of income potential and thus a real increase in value of the house.
You may not have this exact ordinance in your town, but my point is to look for something that is restrictive or expensive in a local ordinance and find out if there is a grandfather rule. If so, you could target those properties and buy them knowing their true value.
#2 – Your Local Comprehensive Plan
A comprehensive plan is as close as you will get to predicting the future in your local market. It is created by city planning officials every 10 years in order to create a sort of roadmap of recommendations for the city’s elected officials, staff, and citizens as they manage the city over that period of time.
Usually, there is a master plan for the entire community, and then often there are many smaller master plans for neighborhoods or communities within the city. See this list of master plans in Greenville, SC nearby where I live.
In my own town, the comprehensive plan is divided into different categories like these:
- Land Use
- Priority Investment
Within each category, you will find overviews, statistics, goals, and strategies to accomplish those goals. For example, with housing, you will usually see statistics of housing growth, median prices, number of new building permits, etc.
All of this information is helpful as a backdrop to the individual investment decisions you will make as you attempt to buy properties. For example, if you know certain parts of town are scheduled to have massive infrastructure investments by the city in the next 10 years, you may be more confident to buy and hold a rental in that general area so that you can ride the positive wave if the area sees improvement. As always, there are no guarantees, but using information wisely can improve your odds of success.
I recommend that you start just by searching and finding your own comprehensive plan. Make it a goal to read a certain part of the plan every week. Take notes of statistics or projects you find interesting or helpful. And if you have questions or are unclear about something, make an appointment to talk with the City Planning office. I have found them to be incredibly friendly and willing to help in my own case.
#3 – Your Local Zoning Ordinances
A city’s zoning ordinances are the laws that dictate how property in specific zones of the city can be used. For example, the land is usually divided between residential, commercial, industrial, and public/park space. Within each of these general categories, there are smaller divisions, like various single family and multifamily categories within the umbrella of residential. Within each category, the zoning laws also dictate things like how small a lot can be, how much density can be built, how tall a building can be, and where on a lot the building can be built.
Depending upon the zoning type of a property, the market values for resale and for rent can vary widely. This is true because, for example, the renter of a retail shopping space is often willing to pay more than the renter of a duplex. This is also true because the zoning laws make it easier to build on certain lots than others.
While many parts of zoning can be helpful to learn, the most valuable thing to know is the locations of the commercial, residential, and industrial zoning districts and the differences between each. One of the biggest opportunities in this area is to find properties that are currently used as one thing, but could be switched based on zoning to something else.
For example, you might find a single family house on a one-acre lot that is zoned multifamily. It is possible that the value of just the land for building a multifamily is more than the value of the single family house itself. So you might be able to pay a premium price, scrape the single family house, and build your multifamily rental.
If you didn’t know about this zoning opportunity, you might have used your same old formulas based upon income or resale comps for single family houses, and you probably would have missed out on a deal that a more knowledgeable investor would snap up.
Another opportunity, especially in dense and popular urban markets, is to find large lots that can be subdivided to provide an additional building lot. When you add the extra value of this additional lot, you can often make additional profit or maybe pay an additional premium in order to outbid some of your competitors who don’t understand the zoning laws.
Finally, I highly recommend studying zoning maps. I am sort of a map nerd, which might be the reason I ended up in real estate! I suggest printing and enlarging a color-coded zoning map and putting it on a wall in your office. Here is an example of the zoning map for Greenville, SC.
One of the many pieces of information you will gain from consistent study of these maps is the relative rarity of one type of zoning to another. In economics, a more rare asset tends to be more valuable. So if you notice that very little vacant land exists with dense multi-unit residential housing, it might mean that owning an existing building in that zoning district could have long-term appreciation potential. Why? Because there won’t be a lot of competition from new construction.
Becoming a Member of Your Community is the Ultimate Advantage
I have given you several uncommon strategies to gain a competitive advantage in your local real estate market. They have worked well for me, and I hope you will take advantage of them.
But in the end, I hope you will take it a step further. I have found that my ultimate advantage isn’t something calculating or business-specific. The best competitive advantage is just to be a good citizen who contributes to your community.
By volunteering locally, joining civic organizations like Rotary or Lions Clubs, or spearheading a community improvement project, like turning around an old vacant building or organizing a grassroots movement to build a bike trail in town, you will learn more about your town than you could ever hope to looking from the outside in. You will also prove to yourself and to others that you care about your community for more than just turning a profit.
If you love your town and if you want to make it better, the positive seeds you plant will come back to you many, many times in the form of happiness, friendships, and also market knowledge.
Best of luck becoming a big fish in your own little ponds.
What do you think? Are there other competitive advantages I have left out here? Do you have experience studying local ordinances and plans? What unique opportunities have you found in your town?
Leave a comment below, and let’s talk!