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Mastering a New Real Estate Market: A Beginner's Guide 🤔📊
Learn the vital steps to effectively enter and invest in a new real estate market with confidence.
Are you a beginner looking to venture into a new real estate market for the first time? The prospect can be both exciting and daunting. However, with the right approach, you can navigate this unfamiliar territory successfully. In this blog post, we'll walk you through three crucial steps to help you start buying deals with confidence.
Step 1: Source Market Rents
Your first objective is twofold: to build a Profit and Loss (P&L) statement from scratch and to determine where to buy—or where not to buy—in the market. To achieve this, you need to start by understanding market rents.
Ideally, you should have access to platforms like CoStar or MLS for accurate rental data. However, if you don't, you can reach out to brokers who are currently marketing deals and ask for comparable rental data from their specific deals. If that's not possible either, you can turn to online resources like Zillow or Apartments.com. While these may not provide "closed" comps, they can still help you triangulate market rents.
Step 2: Understand Expense Load
The next step is to comprehend the expense load in the market. Platforms like LoopNet or Crexi are excellent resources for finding actively marketed deals in your target area. Click on individual deals and download every Profit and Loss (P&L) statement you can find. If these statements are not publicly listed, don't hesitate to call the broker and request them.
You should aim to collect a minimum of five P&L statements. Once you have them, organize them in an Excel spreadsheet, and catalog the following:
The cost of each line item per unit (utilities, insurance, etc.).
The cost of each line item per square foot.
The overall Net Operating Income (NOI) margin.
This data will enable you to underwrite new deals from scratch. With the unit count known, you can reference your data to determine appropriate costs per unit, which you can then incorporate into your underwriting.
By this point, you should be capable of creating a complete P&L statement, as you now have both revenue (market rent) and expense load data at your disposal.
Step 3: Get to Know the Market
Understanding the market itself is essential. You want to identify areas to avoid and areas where it makes sense to invest. To gain insights, reach out to five brokers and, while discussing a deal they have listed, casually inquire about their preferences regarding different areas within the market.
Although this may not provide a definitive answer, it can quickly highlight the most promising and challenging submarkets in the city, giving you a guide on where to buy.
Moreover, properties are valued based on the market capitalization rate (cap rate). To make informed decisions, you'll need to determine the market cap rate. Here's how:
Gather financial information (NOI) on every property listed for sale in the market. This information is either publicly available on LoopNet/Crexi or requires signing a Confidentiality Agreement (CA).
Monitor deals as they transact to find out the sale prices, and note the in-place cap rate and stabilized cap rate.
Adjust for any unique circumstances or anomalies.
With these steps completed, you now possess crucial information about market rents, expenses, the market cap rate, and the best and worst submarkets within the city. Armed with this knowledge, you're well-prepared to start buying deals.
The best part is that this process doesn't take long and can be completed within a week or two. With diligence and dedication, you can confidently enter a new real estate market and begin your journey as an investor.