How to Become an Expert in Your Market
My goal for you:
is to have expertise in your sub-market because experts make more deals, they do better deals, and they make more money than those who are not experts.
In this blog, you will learn:
- how to become an expert in your market,
- you’re going to learn how to never overpay for a property
- you’re going to learn how to correctly value a property every time
- you’re going to learn how to avoid buying properties that end up with zero cashflow
- Lastly, you’re going to learn the best way to make sure your deals, if you wholesale them, are attractive.
The Four Things Needed to Become an Expert in Your Sub-Market
Number One: I need you to find out what the price per unit is.
Now I’m going to use the apartment business as the basis for this presentation, okay? If you have a five-unit property … All right, let me get my calculator out … If you have a five-unit property and each unit is fifty thousand dollars, the total purchase price is two hundred fifty thousand dollars.
The price per unit is fifty thousand dollars. To become an expert in your sub-market, you have to know the price per unit. If you are looking at an office building or shopping center, then you have to know the price per square foot. Number one is you have to know the price per unit.
Number Two: You have to know what the market cap rate is
You have to know what the cap rate is for your market. Very important.
Number Three: You have to know what the market rents are
Again, in the apartment business, you have to know what the rents are for the one bedrooms, two bedrooms, and three bedrooms. You have to know that if you want to become an expert in your sub-market and do the best deals and make sure you don’t have negative cashflow.
Number Four: You have to know expenses per unit
These are operating expenses, okay? Operating expenses per unit is really, really important. Now I’m going to make a note here. I need you to find out the expenses per unit for B and C class apartments. Okay?
Quick Review:
Know the price per unit, know the cap rate for the market, know the market rents, and know the operating expenses per unit. What I mean by per unit is let’s say the expenses are thirty thousand dollars for the whole year and you have eight units, so thirty divided by eight is three thousand, seven fifty. That means the expenses per unit is three thousand, seven fifty per unit. Very important number.
Much like an area has a cap rate stamped on it, an area, a sub-market, also has an expenses per unit number attached to B and C class properties, too.
Why You Need to Know These Four Things and How to Get Them
Now Here’s a Question:
Why do you need to know the price per unit in your sub-market?
I have a couple of reasons for you:
- If you want to become an expert in your area, you have to know because it helps you gauge your offer price. If you’re thinking about making an offer on a property, what are you basing it on? Are you basing it on what the broker gave you? What the seller gave you? That’s a no-no. You have to base it upon, number one, what the average price per unit is in your sub-market.
- Another reason why to know a price per unit is to make sure you don’t overpay. Okay? You don’t overpay.
- The reason why to know the price per unit is to know if the sellers’ asking price is realistic. The sellers may be asking for an astronomical price, but if you know the average price per unit in your sub-market, you know if this asking price is realistic.
- If you are a commercial wholeseller, then you know if you have an attractive deal or not if you know what the average price per unit is in your sub-market.
Now can you see how important this is? How important it is to know what the price per unit is in a market?
How to Get the Price Per Unit in Your Sub-Market
- Number one is to research properties that have already sold on the MLS. If you find a five-unit that sold for five hundred thousand dollars within the last year … Do the math. Five hundred thousand divided by five equals one hundred thousand dollars per unit. Now you know. You researched one property, so research others, many others, so you can come up with an average price per unit for your sub-market.
- Number two, the second way, is go ahead and ask two or three commercial real estate agents for sales comparables for your sub-market, okay? When you ask for sales comparables, you can just ask him … “Mr. Agent, I would like sales comparables for five to twenty units in this sub-market.” They give that to you, look at the information, and average out the price per unit. That number is golden for you.
Why Do You Need Know the Cap Rate in Your Sub-Market?
Easy answer … Because you want to become an expert, right? Not only that, it’s because every market has a cap rate stamped onto it and you need to know the seller’s asking cap rate. Go ahead and ask yourself once you know the seller’s asking cap rate, are you under the market cap rate or are you over the market cap rate?
The reason why is being under the market cap means that the seller’s asking price is priced above the market average, meaning that you’re about to overpay or he’s asking for too much. However, being under or being over the market cap means that the seller’s asking price is under market and so is his asking price. Okay? You got it? Cap rates helps you not overpay. That’s the bottom line.
Too many people overpay today because they do not understand what the sub-market’s cap rate is. Go out there and get it.
Here’s how you get it …
- Ask two or three commercial real estate agents for the market cap rate. Just call them up and say, “Hey, Mr. Agent. Can you tell me what the market cap rate is for B and C class apartments in this sub-market?” Ask two or three of them and then average out their answers.
One thing I want you to remember too is to request the cap rates for only B and C class and not A class, okay? A class, the actual cap rates will be one percent or more lower because very influential area, a wealthy area, a high priced area, high rent area, and is not comparable to your B and C class area.
Why Do You Need to Know the Market Rents in Your Sub-Market?
It’s because you want to become an expert so you can buy the best deals. Now I’m going to give you a couple of reasons why you need to know.
Number one is so that you can make a quick judgment on if a certain deal has room to increase the rents or not, right? That’s really important when you’re buying commercial property is to see where the rents are today to see if you can raise the rents next month or next year.
Sometimes the agents or the sellers, well, they’ll tell you that there’s upside in the rents, but I’m telling you … It’s actually up to you to know if that’s the case or not. How do you know if that’s the case or not? By knowing what the market rents are in your sub-market for one bedrooms, two bedrooms, and three bedrooms.
- Now the bottom line is this: Don’t forget that if you can raise your rents, you will raise your NOI then you’ll raise your property value. Knowing market rents allows you to see what potential upside and profits you have in a property. Very important, very important. If a broker or agent says, “Hey, there’s plenty upside here”, you can quickly know that if you know what the market rents are.
Now how do you get the market rents in your sub-market?
- There’s a website I like to go to for a real quick check. I like to go to rentometer.com. I go there and I put in the criteria. I can quickly check out my subject properties’ rents compared to what the active listings out there are for rentals. Okay? Quickly check it.
- The second way is to ask a real estate agent to get a few rent comparables for you … For him to send that to you. Here’s the key … I need you to make sure that what he sends you is actually from a comparable property. All right? If your property is built in 1970 and he sends you properties built in 2000, that is not comparable. If he sends you a property that is ten miles away from your property but similar in makeup, that is not a comparable.
If he sends you a property that your property has all separated utilities, but the property he sends you is master metered, right? That is not comparable. Okay? Make sure that when you look at agents comparables that the properties are comparable to one another in location and in characteristics.
Why Do You Need to Know the Expenses Per Unit in Your Sub-Market?
Again, it’s to become an expert.You need to become an expert. Don’t do any deals without becoming an expert in your sub-market.
Why You Need to Know the Expenses Per Unit
- It’s because underestimating property expenses is one of the biggest reasons why beginning investors don’t experience cashflow. I made that mistake in the past. I will never do that again.
- Secondly, it’s because both the agents and sellers never give you accurate property expenses, all right? Never. Just because a broker’s nice, just because he’s full of integrity, it doesn’t mean that the property expenses are accurate. They’re doing their best, but they don’t own property. They’re just giving you what the seller gave them. It’s up to you to fill in the gaps when the expenses are lower or higher than what they appear.
The reason why you know that, if they’re too low or too high, is because you know now how important it is to know the expenses per unit in your sub-market for a given apartment building. Don’t forget … If you don’t know expenses per unit in your sub-market, you probably will overpay. You are probably not cashflow.
It’s really, really important.If you know the expenses, you’re going to buy a great deal and you’re going to cashflow the way you projected to cashflow. That’s why it’s important to know expenses.
How Do You Get The Expenses Per Unit in Your Sub-Market
- Number one is research, research, research. Ask a property manager of a medium sized to a large sized property management company what the expenses are in your sub-market. They know that information. You know why? It’s because they prepare budgets for their clients.
At the bottom of these budgets, because we do them every single year, is a figure called “expense per unit”. Okay? If they own property in your area, manage property in your area, they’ll know what the expenses are per unit.
- Number two, you can do what I did. I looked at, and still do, a ton of deals, ton of deals. I also look at a bunch of seller financials. From those deals and financials, I average the expenses for a given sub-market.
Conclusion
Whenever I go into a market, this is what I do. I look at these four things. Probably the most important thing is the expenses per unit. I look at a lot of deals and look at a lot of seller financials from different properties and then I average them out and I come to a conclusion what they should be. Okay?
If a agent or broker gives me a deal let me say expenses are three thousand per unit, right, but my average from all the experience I have says it’s four thousand a unit, I know he’s low. I’m going to add a extra thousand dollars per unit in my expenses. It’s going to affect the deal, yes. Right? It’s going to affect the deal. I’m going to have to offer a lower price, but this is what’s called being a responsible investor, knowing these four things.
Let’s see, so now once you have these four things under your belt, you’re going to become an expert in your market. You’re going to hopefully never overpay for a property. You’re going to be able to correctly value a property every time and most importantly, you’re going to avoid buying properties that end up with no cashflow.
Quick Summary:
to become an expert in your sub-market:
- you need to know the price per unit
- you need to know the cap rate for the market
- you need to know the market rent
- you need to know the expenses per unit
