Across the country, real estate markets are hot … and getting hotter. That means compressed cap rates … which in turn mean a lower rate of return for investors.
So how can investors find a market that will offer great returns in good times and bad? In today’s show, we’ll discuss the market fundamentals that can make or break your next real estate investment deal.
Luckily, markets leave clues. If you’re an excellent market detective, you’ll be able to spot subtle indicators that will help you make an educated guess about the market’s future.
For this episode of The Real Estate Guys™ show, we recruited the best private eye we know to guide us through his analytical approach to investigating and choosing new investment markets.
You’ll hear from:
- Your sleuthing host, Robert Helms
- His clueless co-host, Russell Gray
- Real estate developer and author Victor Menasce
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Stepping into new markets with Victor Menasce
Victor Menasce is the author of Magnetic Capital and a successful U.S.-based real estate developer. He’s a strong believer in the principle that the best markets aren’t necessarily the ones you live in … or near.
Instead of automatically going for nearby markets, Victor undergoes a thorough evaluation process for potential markets, whether they’re near or far.
One of the things we look for when we’re analyzing a new market is net in-migration … essentially, we want to know whether there are more people entering the market than exiting.
Metrics like these can help you predict whether a market will serve your investment goals.
For Victor, market evaluation begins with the most basic metric of all … supply and demand. That means choosing a market where demand outpaces supply.
He says investors should focus on three things when entering a new investment deal, in the order listed:
- The market.
- The team who has boots on the ground in that market.
- The specific investment opportunity.
If you perform due diligence on the market and the team and something doesn’t line up, then you need to step back and reassess … before you even look at specific investment opportunities.
Philadelphia market analysis
To model his process for market choice, Victor guided us through an analysis of one of his current investment markets … Philadelphia.
“You have to look on the macro level,” Victor says.
Like many large American cities, Philadelphia has a large low-income population. This is a benefit, says Victor, because it creates areas where high-priced real estate and low-priced real estate brush up against each other.
The key is to find the arbitrary line between high and low properties … and then move that line by creating value.
Another reason Philadelphia is so successful is because of its proximity to an overpriced, overcrowded market … New York City. Victor says he sees a lot of renters moving from the New York market to Philadelphia because of its relative affordability and proximity to the Big Apple.
Two other big factors Victor looks at are population influx and job creation and availability.
He also evaluates cap-rate compression. That’s how he discovered that he can build new for 25 to 30 percent less than he can buy used. “That’s a competitive advantage,” Victor points out. “We’re creating opportunity out of thin air.”
Another point of consideration is rental rate per square foot. In Philadelphia, Victor can charge between $1.50 and $1.75 per square foot … $1,200 to $1,400 per month for an 800-square foot B-class apartment.
Victor compares that to Raleigh, North Carolina, where the average rents average $1.15 per square foot, even for class A properties. That’s about $920 for the same 800-square-foot apartment, for context.
Although rents differ, the cost of building in Raleigh and Philadelphia is comparable. That’s why Philadelphia makes far more financial sense for Victor.
Victor also walked us through the process of finding a team in the Philadelphia market. “I only go to Philadelphia one to two times a year,” he says. He started by making friends with an active group of investors already in Philadelphia who had good connections to local contractors and businesses.
Then, he amassed property by buying land and derelict structures for “pennies on the dollar.”
Lake Charles, Louisiana market analysis
Although big markets like Philadelphia generally make more sense for real estate investors and developers than smaller markets with fewer resources and infrastructure, Victor is currently investing in properties in a small town in Louisiana.
Why? The town, Lake Charles, has several compelling factors that make it a great place for long-term investing.
He walked us through his process of discovery and analysis.
Through personal relationships with people in the Louisiana real estate market, Victor came across Lake Charles, a town on the I-10 corridor.
The town is poised to produce 118 BILLION dollars of natural gas over the next decade … now that’s a staggering number.
Because of its increasingly important status as an exporter of natural gas, jobs and ancillary services are expected to increase over the next decade … and with that, the population is expected to keep rising.
With 48-50 billion dollars of construction in the works or anticipated, the population growth isn’t solely temporary workers, but also new permanent residents.
This is a town where skilled labor prevails, so the average household income is north of 90k a year … not the typical tenant profile. That means rents in Lake Charles average around $1.50 per square feet, even though it’s not a major city.
Because Lake Charles is growing so rapidly, it needs construction of all kinds. So Victor has dipped his feet into several markets, including workforce, family, and senior housing as well as medical offices.
It’s a lesson to investors … start with the market, then discover the needs and assemble a team to address those needs. Investors who go into markets operating only in a small niche may miss the best opportunities.
Why is Victor so confident in Lake Charles? “This is a town that has embraced heavy industry,” he says. He expects few obstacles to pop up as the town continues to grow. And he’s confident in his assessment because he has relied on folks who have their boots on the ground.
Treat real estate investing like a business
Victor has a pragmatic approach to market analysis. He’s logical and thorough and treats every investment decision like it’s a business decision.
We like to say that most people know a little about a lot, but Victor knows a lot about a lot. But he also knows his limits.
It’s really hard to be involved in more than a handful of markets at once … careful investors can’t do the kind of analysis Victor has done for Lake Charles for 30 markets simultaneously.
And Victor has spent the time to cultivate relationships with his teams in Lake Charles and Philadelphia. That’s important too.
We think Victor is a great resource for investors looking to take a careful approach to market choice and more. Looking for more real estate wisdom? Listen in to his Real Estate Espresso podcast, a 5-minute, interview-style briefing he puts out 7 days a week.
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