The primary problems for nascent real estate investors are knowing what to ask and whom to trust during this phase. Small property owners looking for growth or expansion opportunities often start by finding an experienced broker to walk them through the process. While there is nothing wrong with hiring a broker, it’s important to realize that real estate brokers typically work for the seller, focusing on moving inventory as quickly as possible at the highest price.
Understanding valuation strategies and creating a list of essential questions to ask during the search for new apartment homes can make the difference between just buying more units and investing in property with substantial income potential.
Be Inquisitive About Market Factors
As a property manager, you may have read a market analysis at some point during your experience in the real estate industry. But, not every market analysis is based on the same data set. To provide the highest benefit for an investor, a market analysis should minimally answer three basic questions:
- Are there renters seeking homes in the area that fit the size, location and property type?
- How quickly can vacancies be leased?
- What determining factors impact rent rates and retention percentages?
Other considerations are the supply side and demand side determinants. A good study reveals important data about the demographics and economic conditions in the region. For example, on the demand side you’ll want to ask a few basic questions to explore tenant potential. Does the region overall enjoy stable growth and migration patterns? Will this investment produce affordable homes that parallel income levels and population purchasing power?
Conversely, an analysis of the supply side will answer questions about existing conditions. Are rent rates rigid or elastic and responsive to changing conditions? What are the current absorption rates, vacancy rates and length of occupancy for similar properties? Can the proposed investment compete with completion effectively based on past performance?
Understanding the Nuances of Valuation Variables
Before accepting a blanket statement of value from any authority, ask what basis the valuation is grounded on. Determining a property value is highly subjective. Whereas a tax entity follows a precise formula to establish property worth, owners often attach intrinsic values based on length of ownership, personal time investments and relationships with current and past tenants. Each independent valuation is based a set of assumption and both qualitative and quantitative parameters.
While there is no one standard for setting value, gather information about the guidelines used to set the financial value. Ask if the value includes geographic considerations, dedicated market research and both primary and sub-market operating success ratios.
Marketability and Competitive Edge
Even if you find a property that has a strong reputation in the community and has market research that indicates strong revenue potential based on market analysis and past performance, don’t ignore marketability.
Marketability refers to the ease with which a product or service can be bought and sold in the open market. Residential units are highly marketable when the property has one or more highly desirable characteristics – such as location, price point, floor plan design or a rigorous sustainability program.
A wise property manager goes beyond reports that suggest positive marketability potential to explore competitive apartment home communities nearby. By comparing similar properties, owners and managers have unique insights helpful to measure marketability of prospective investment properties.
Growth, value, and marketability are equally important when planning an expansion strategy. Make sure you’re asking the right questions on your decision-making journey.