Are you an investor who lives in a real estate market that has no shot of cash flowing? Does your market have a scarcity of listings? Are the cap rates in your market bordering on ridiculous? If so, it may be time to begin to expand your horizons and tap into different markets. In this article, I am going to focus on how to engage a broker, how to begin researching an unfamiliar market, and what types of questions to ask a broker in order to assess the viability of the market.
Let’s begin with a broker’s script. As an investor, it is your job to convey to the broker what your specific niche is and what your objectives are. For instance, the script that I have written reads as follows:
I am an investor in the Knoxville, TN area, and I am looking to purchase apartment buildings in your market. We like to buy B and C type properties that contain between 30 and 150 units. We like to buy properties that have at least a 10% cash on cash return and a cap rate of at least 8. We specialize in purchasing apartments that are run by mom and pops, which allow us to add value and increase the cash flow. Would you have any properties that fit these criteria?
Now, what do you achieve with a broker script? A script allows you to convey to the broker your investing criteria along with the type of asset you are interested in purchasing. It also validates your credibility and allows the broker to concentrate only on the deals that fit your criteria.
Fear and lack of control are two main factors that keep most real estate investors from investing outside their “backyard.” My first foray out of my market was purchasing a duplex in Rochester, NY. This was an enormous leap of faith for someone who craves control and is skeptical about outsourcing any tasks. This initial step taught me how to invest successfully hundreds of miles from home and eventually led me to investing in the East Tennessee market, where I have been able to accumulate 674 units in three years.
It is said that a journey of a thousand miles begins with a single step, but if that step is not in the right direction, then your destination will be completely way off base. I have assembled this list of questions in an effort to lay the framework for investors who choose to venture outside their comfort zone in pursuit of higher returns.
Once you have engaged a broker, use these questions to familiarize yourself with the market.
28 Questions to Ask a Broker When Investigating Out-of-State Markets
- What is the job growth?
- What is the population/household growth?
- How many new units have been built over the past three years?
- How many construction permits have been issued?
- Are properties listed on the MLS or is it a broker driven market?
- How many listings do you currently have and what have you recently sold?
- What is the typical size of a deal in your market?
- Who are the major employers?
- Are there any barriers to entry in your market?
- Who is currently investing in the market?
- How are these deals being financed?
- Where are the B and C properties located?
- Can you identify the path of progress in your market?
- What is the per-unit cost of an apartment?
- What is the vacancy rate in the market?
- What has the rent increase or decrease been over the past three years?
- What are the cap rates for specific asset classes in the market?
- Is the market a cash flowing market or poised for capital appreciation?
- What is the average age of the properties?
- Does the market employ RUBS (ratio utility billing)?
- What are current rents for various unit mixes (studio, 1-bed, 2-bed, 3-bed)?
- Can you recommend a management company?
- What are the fees charged by a management company to manage a property?
- What is the affordability of homes in the market?
- Can you recommend an insurance company?
- Can you recommend a mortgage broker and a bank?
- Do you have any deals I can analyze?
- Where are we going to lunch?
1. What is the job growth?
Jobs are a key indicator of the health of a market. Jobs attract people to the market, and these people become our customers. With people flooding the market, it puts pressure on rents and vacancies in a positive light to owners. Conversely, with a stagnant job market, it may be difficult to attract tenants.
Look to markets that are announcing new employers moving into the market, such as Amazon opening a distribution center in Jacksonville, Florida. The rule of thumb for job growth is at least 2% job growth for at least two consecutive years.
Related: What Moving Out of State is Teaching Me About Remotely Managing Rentals
2. What is the population/household growth?
A market that has been losing population is a market in decline. Many of the markets in the Northeast are shedding people due to higher taxes, cost of living and weather, to name just a few reasons. Look for markets that are adding numbers to their population, especially households. Households, which comprise families, are the demographic that rent apartments. Once the market begins to experience population growth, you will see a rise in rental growth.
3. How many new units have been built over the past three years?
One way to assess the health of a market is to check how many new units have been added or are currently being built in the market. Many markets in the United States are currently in the expansion phase, where new inventory is being added. This may pose a problem. If the market is adding more units than it can absorb, then the market will have to react by either dropping prices or offering concessions to tenants. You want the demand to always exceed the supply in any market.
4. How many construction permits have been issued?
This metric is similar to the number of units being built. It is another way to gauge the health of the market. If construction permits are on the rise, then new construction will begin and jobs will be created by this new construction.
5. Are properties listed on the MLS or is it a broker driven market?
At first, I did not understand the importance of this question. As a newbie, my understanding was that all deals could be found on the internet or the Multiple Listing Service (MLS). This is not the case in certain areas of the country. For instance, in the Southeast, it is a broker market, which means that brokers control many of the listings and have amassed huge buyers lists that receive the latest offerings.
If you have not networked with these brokers, chances are you will not have access to these deals. On our 156-unit deal we closed on in March, we were fortunate to have established a relationship with the listing broker. He notified us of the deal, and we were able to bid on the property when he held a call-to-offer. In either scenario, it is still vital to establish relationships with brokers.
6. How many listings do you currently have and what have you recently sold?
A key indication of a competent broker is the number of listings he currently has in the market. I have found that Pareto’s principle (the 80/20 rule) holds true for brokers as well; twenty percent of the brokers control eighty percent of the listings. It is your job to connect with these active and successful brokers and try to do business with them.
If the broker has sold properties over the last 12 months, he will have a much better idea of values in the market. I always look for brokers that have sold numerous deals. Sellers seek out these active brokers, and this gives the broker a constant stream of new inventory.
7. What is the typical size of a deal in your market?
When I first began investing, I put no thought into what my portfolio would look like in the future. I never focused on my exit strategy, a mistake that most newbie investors commit. What if I decided to expand into larger multifamily properties? Ask the broker the type of inventory in the market, what the average size of a deal is, and how many transactions are executed in the market.
By type of inventory, I am referring to single-family homes, duplexes, commercial, apartments or industrial. If your niche is multifamily properties, but the market has a small inventory of these types of assets, this will pose obvious problems. I tend to focus on markets that contain a plethora of multifamily properties.
8. Who are the major employers?
Ask for a list of employers in the market and any new companies entering the market. I prefer to have a market with a diverse group of companies offering employment. If a market is too dependent on a company for its jobs, trouble may arise if that employer decides to downsize or leave. Employment stability is also a factor to consider. How reputable are the companies in the market? Do these companies provide services that are in demand and offer high paying job?
Cities such as Rochester were heavily dependent on companies like Kodak and took a huge hit when these companies and their jobs disappeared. It is also positive when a market has a variety of industries offering employment.
9. Are there any barriers to entry in your market?
Cities that possess a high barrier to entry often drive up the price for real estate. Barriers to entry can encompass many variables, such as being surrounded by a desert, excessive fees to construct a property (think of NYC), or high replacement costs. If the market has few options for expansion, the existing land and buildings become more valuable.
Alaska is just one example of a market that exhibits a high barrier to entry. This high barrier has led to a spike in the value of multifamily properties, and trying to invest in that market based on actual performance is practically impossible. If you own property in that market, cha-ching! But trying to invest in that market is another story.
10. Who is currently investing in the market?
My goal is to locate markets that have not been discovered by large institutions. Once the big boys move in, prices start to escalate. The goal is to get in before they do. Investing in a market with “mom and pops” is much easier and valuations, will be lower. The fewer the number of buyers in a market, the lower the valuations will be. It is always advisable in business to identify your competition and what their operating procedures are.
11. How are these deals being financed?
I was performing my initial analysis of a market in the Midwest, when a broker informed me that the majority of the deals he sold were all-cash deals with barely any discount from the list price. What did this tell me? That the market was hot and the majority of investors were from out of town. It is pretty difficult for me to compete with all-cash offers, especially ones that do not receive a substantial discount.
I would not shy away from this type of market, but I would rather be in a market where seller financing is an option — or even traditional bank financing from a local bank.
12. Where are the B and C properties located?
My focus is on investing in B and C assets, and I want to know what neighborhoods these assets are located. Click here to learn about asset classes if you are unfamiliar. It is rather obvious where the A assets are in a market. Our goal is to identify B locations that contain C properties. If you can reposition the C asset into a B, the quality if the tenant will increase, and therefore you will be able to generate a higher rental rate. If your niche is A or D properties, then become familiar with those neighborhoods.
13. Can you identify the path of progress in your market?
The path of progress describes where the growth of the city is headed. Try to figure out where the path of progress is headed in a city and look to invest in that area before prices escalate. We all have areas in our market where there is new building entering and people are flocking to those parts of the city. If you can pinpoint that migration and get in early, serious wealth can be created.
14. What is the per-unit cost of an apartment?
Try to establish what an apartment is going to cost. For instance, try to get an idea of what a studio, one bed, two bed and three bed is selling for in the market. It may be difficult to assign a fixed price due to factors such as size, age, number of bathrooms, amenities, etc. I always ask for the typical price of a two-bedroom unit in a C class property. This will give you an idea of what properties are trading for in the market.
15. What is the vacancy rate?
One of the factors that determines the health of the rental market is the vacancy rate. As of this writing, the occupancy rate nationwide is 96.1%. If your market has a 90% occupancy rate, this may indicate a soft market. I always try to uncover properties that contain some vacancy in a strong market. The ability to fill those vacant units at market rate is a huge value-add.
It is your job to find out why there is vacancy in a strong market. Is it poor management, high rental rates, unattractive buildings, or unappealing unit mix? Just because a property has a high vacancy doesn’t mean you should shy away from digging deeper.
16. What has the rent increase or decrease been over the past three years?
The sign of a “mom and pop” operator is a property that has maintained their rental rates steady for the past few years. In this current environment, rental rates have been rising steadily for the past several years. A market that has stagnant rent growth may indicate a weak market. On the other hand, a market with strong rental growth may make renting a more affordable option than buying, thus creating more “clients” for your apartment.
17. What are the cap rates for specific asset classes in the market?
Multifamily real estate employs cap rates as one vehicle to analyze value. Learn what the specific asset classes are currently being sold for in the market. For instance, in our market of East Tennessee, B assets are currently trading for around a 7 cap. If we find a B property with a higher cap rate, it is time to investigate further.
18. Is the market a cash flowing market or poised for capital appreciation?
Some markets are notorious for their ability to cash flow, and some others are predominantly cap appreciation plays. Choose what type of strategy you are willing to follow, and invest in that type of market. For instance, when I selected Rochester as a market to invest in, I knew that cash flow was king and capital appreciation was non-existent. The goal is to identify markets that cash flow, yet have the ability to appreciate.
19. What is the average age of the properties?
This is a fairly obvious question, but most of us pay little attention to the age of the assets in a market. Do you want to invest in properties that are over 100 years old that will constantly need capital repairs? Or are you the type that likes to purchase shiny, new asset? Once again, my properties in Rochester were built at the turn of the twentieth century, and I needed to spend more money to maintain these assets. There is no right or wrong answer, just understand the pros and cons of both assets.
20. Does the market employ RUBS (ratio utility billing)?
Ratio Utility Billing is a system of recouping utility costs from a tenant. It is a fairly simple and easy system to implement. If the market employs this system, look to identify properties that do not employ RUBS. On one of our deals, the landlords did not bill back the tenants for utilities. We researched the market and found that the norm for the market was charging the tenants $35 per month for utilities. We were thrilled with this discovery. At takeover, we quickly began implementing RUBS, and within 12 months, all the residents were paying their portion of utilities. This is another huge value-add.
21. What are current rents for various unit mixes (studio, 1-bed, 2-bed, 3-bed)?
Become very familiar with rental rates for different unit mixes in a market. Identifying properties that have below-market rents is yet another value-add. Once the property is acquired, it is the investor’s job to add value to the property and raise the rents to market. We use www.rentometer.com to get a general idea of market rents. You can also visit www.apartments.com for rates in a market.
22. Can you recommend a management company?
I think the bane of any real estate investor is the management company. Ask the broker his recommendation for a management company. But make sure the management company has experience in the asset class you are investing in. I also visit Irem to research management companies in a specific market or All Property Management to search a directory for companies local to the area. Interview as many as possible, and take them out to lunch when you fly into a market to inspect properties.
23. What are the fees charged by a management company to manage a property?
Assess the market rate for fees charged by a management company. There are rules of thumb for different number of units, but focus in on your market and pay the going rate. Some markets may be too expensive to high management or may not have any qualified companies. Better you find out sooner than later.
24. What is the affordability of homes in the market?
Affordability of homeownership may shed light on a couple of factors. First of all, homes may be too expensive and people have to turn to renting. Secondly, homes may be too expensive for the workforce, and companies may decide to relocate to another market.
Toyota decided recently to move 3,000 jobs from California to Texas for a variety of reasons, but home affordability was one of those main factors. The median home price in Dallas, Fort Worth is about $210,000, while in Torrance, CA, the price is $508,000. Yet Toyota is going to pay the workers the same salary. It doesn’t take a math whiz to figure out why jobs migrate to certain markets.
25. Can you recommend an insurance company?
There is no time like the present to start building your team. An active broker will have a network of professionals at his disposal. Ask the broker for a couple of insurance agents who deal strictly with multifamily properties, and contact them to discuss the market. When you decide to visit the market, schedule a meeting and discuss the cost of insurance in the market and the various programs they offer.
26. Can you recommend a mortgage broker and a bank?
Continue the team building by asking the broker whom he recommends as a bank that is aggressively pursuing to expand their portfolio of multifamily loans. Local banks that are hungry for business make great partners to work with and will understand the real estate values in their market much better than a regional bank. Mortgage brokers are also valuable team members in that they have the ability to search multiple locations for financing. We were fortunate to partner with a local bank, so we had no reason to seek out a mortgage broker. In the beginning, explore both opportunities and ask the broker for his opinion on a local bank versus a mortgage broker.
27. Do you have any deals I can analyze?
Don’t forget to ask the brokers to send you deals to start analyzing. I would send over the broker your business plan or a set of criteria you adhere to when investing. Expect the first couple of deals to be real stinkers. Thank the broker for sending them over, and then tell him why these deals don’t work for you. This is their way of testing whether you are a serious investor or someone who is going to waste their time. I can’t blame them. These brokers receive countless phone calls every week from out-of-town investors “looking” to invest. Your job is to stand out, and respond to them immediately. Do as you say and say as you do!
28. Where are we going to lunch?
The Italian in me can’t resist including this as a final question. I love to eat, and if I’m in a new city, I want to explore the culinary delights. Ask the broker to select a busy restaurant where all the movers and shakers eat, and don’t be cheap. Pick up the check and order an espresso at the end. Seriously, going out to lunch will allow you to build rapport with the broker and discuss the market in more depth.
I hope you have enjoyed this article on researching a market outside your backyard. Use this article as a script to ask brokers these vital questions to assess the health of a market. Brokers are a vital team member, and once you find a good one, treat them like gold.
Begin to research potential markets to invest. Once you have chosen a market, log onto Loopnet or the MLS and find out who the active brokers are in the market. Pick up the phone, call the broker, introduce yourself, and begin to ask him these questions. I would recommend calling at least two brokers in the market. If your instincts about the market have been confirmed, book a flight and schedule a meeting with the broker when you visit the market. Finally, have fun!
Investors: Any questions you’d add to this list? Which markets are you considering?
Let’s talk in the comments section below!