What is it to "know your market?"

Question

Hey all,

This question has been asked in many forms and answered a hundred times. Feel free to link me if another discussion is similar enough to my question.

Newbie investor; I have my first property under contract and am in the middle of due diligence (I'll post the finals when it's all through). I'm super fired up about it and am undertaking the task of "understanding my market;" which is Tucson, AZ, by the way.

To me, understanding my market means knowing what a 3/2 rents for compared to a 2/1, what a house in West University rents for compared to a house on the south side, what a 4 plex costs per door compared to a duplex, and the like.

My attempt to answer this question is to self-analyze 400 properties over the next 6-12 months: 200 SFHs, 100 MFHs and 100 MHs. I hope getting data for what is "normal," "high," etc for where I intend to invest, so I can compare any deal to those numbers.

My question is what should I be looking for? What defines a market? What metrics should I start keeping track of?

A few I've come up with:

Price per square ft

Price per bedroom (SFH) or per door (MFH)

Cap Rate (particularly for small MFHs, which I hope to make my next "major" purchase)

Cash on Cash return

Debt Coverage Ratio

You get the idea...

Are the most important metrics universal? Does it depend on the market? Or is it something else: like segmenting each neighborhood and comparing numbers only to one another?

If the latter-most, how best to organize it?

Then again: as an investor I don't care so much about property location, size or age, so long as

1) I can put a good tenant in there that will stay for a long time, and

2) it provides a strong CoC ROI with all the numbers considered.

Thanks in advance everyone! I promise I'll start posting more now that I've finally made the leap ;-)

Ned Carey · Answer

First of all I haven't noticed this asked a hundred times. I don't think it is talked about enough.

A Story About Knowing Your Market

I wan to tell you a story about knowing your market. There was a group that targeted a small area on the east side of baltimore. The area was about 15 blocks E-W by 6 blocks N-S.  They had renovated lots of houses and had perhaps 15 in inventory. They had an open house of all their properties that were currently available.

As I walked in one, the guy said you look familiar. I mentioned I had some properties in the area and said I own 12 Bradford street. Without missing a beat he said "How is the circular staircase working out?" I had bought this house 2-3 years earlier at an auction and he knew the only staircase was a tight steel circular staircase.

A little later in the day I met the president of the organization and we started talking about the area. He asked if I had any property in the area. I mentioned one and again, without missing a beat he said "So Pam finally decided to sell" This organization probably knew every house and owner in the area. When a property became available. They knew if first and they knew exactly what it was worth.

The 100 House Rule

You are doing exaclty what you need to do to learn your market and that is look at lots of deals and analyze them. Some people have called this the 100 house rule "Until you have looked at 100 houses you don't really know your market."

Of course 100 is just a made up number, it might be 50 it might take 200 in a complex area. The point is look at lots of deals and evaluate them. What kind of deals?

• Listed properties
• Open houses
• Auctions 
• FSBO
• Wholesaler deals
• Deals from your own marketing

Take advantage of every opportunity to see another investor's deal or rental.

I personally don't think the metrics are as important as the gut feel you will develop. Metrics are important but they are a guideline. No average metric will consider old wiring vs a newly rewired house or weed,m in the crack s in the sidewalk vs every house on the block have well manicured lawns.

You are on the right track young man - just keep it up.

Russell Brazil · Answer

The better you know the market, the better your advantage is.  Not all of the possible market knowledge can be quantified though in simple things like price per square foot or differences in rent.  Things as simple as paint color can help or hinder you from renting a place quicker.  It could help or hurt you when selling a home.  In some markets just being one or two blocks difference can make all the difference in the world.  What types of finishes need to go into different types of properties. Who the builder or architect was can make a difference in some markets. Here in DC two identical houses could be right next to each other, but if one was built by an architect/builder named Wardman, it will command a $50k premium.

David White · Answer

@Patrick Allen Thanks for asking the same question I've been wondering. I never understood how to exactly analyze my market. Luckily this thread has answered some of my questions. @Ned Carey Thanks for your answer. @Gino Barbaro Would reading the Baltimore Business Journal be beneficial to analyzing my market?

Chin P. · Answer

Great story @Ned Carey.  Thanks for sharing.

Jack Butala · Answer

@Patrick Allen

Check this newsletter out http://orionires.com/news.php

I read study this every time it pops in my email.  It's for Phoenix and for commercial real estate but I'm sure there is an equivalent for Tucson. I have no affiliation in any way.

All of those measurement tools you mention are important.  When you are new, review as many as you can.

In the end, it comes down to price per square foot/acre on the buy and sell side.  And rental rates.

We only do deals where we know we can double or triple our money on when selling for cash.  And we only sell on terms when the assets throws off a 50% annual return for more than 10 years.

Hope this helps.

Grant Greene · Answer

I know this may seem like a shameless plug, but I'll say it any way. : )

One of the best ways to "know" your market is meet with a mortgage professional.  He/she will help you create a road map that gives you the discipline and guidance to reach both your short- and long-term goals.  And the best part is you don't have to pay a mortgage pro a dime for his/her guidance - it's in their best interest to give you good advice so you're successful.

Grant

Karl Krentzel · Answer

Greetings From Tucson!

As fellow BP member @Stephen Chatto noted, I am from Tucson as well, and have been investing here (as well as other areas nationally) and have been involved in our market for 19 years or so.

To me, all the metrics you mentioned are certainly good "Rules of Thumb".  However, that is all they are.  Rules of thumb.

Does Price per square foot play a part in pricing a home?  Sure.

Does proposed roadway changes affect value of affected values (i.e. Grant Road extension)? Yes

What value does the 85706 zip code (South Tucson) have over 85756 (SW Tucson)? A huge value.However, all these are simply "Rules of Thumb" that you pick up over years of practice in the field.

Knowledge = Confidence, Ignorance = Fear.

It's certainly a good idea to study the market.  However, if there is ONE thing I've learned in 19 years of practicing actively in this market, is this precious truth...

My advice?  Instead of studying hundreds of homes or analyzing in a spreadsheet the ratios of this metric or that metric...

Just Do It.

Take action NOW because no deal will ever come up perfectly in the numbers.

I'd love to meet sometime if you like, let's meet at a Coffee Exchange or something!

Until then...

Have a Powerful Sales Day!

Jeff Rabinowitz · Answer

The more you know about your farm area (or the areas near your farm area) the more readily you will recognize a deal and the faster you will be able to act on that deal. (True deals do not usually last long). Don't stop once you think you know everything about the area because the market is constantly changing--demographics, prices, employment opportunities, financing rates, etc.. It is a moving target.

Gino Barbaro · Answer

@Patrick Allen

Hi Patrick

To know your market is to understand job growth household growth, unemployment, where is the path of progress, what defines a A B C and D property in your market, what expenses are to run a property in your market.  There are so many metrics you need to understand to buy right which is where you make your money

When it comes to analyzing a property a duplex is analyzed differently than a 200 unit property. Cap rates are used more in larger properties.  Your goal is to buy an undervalued asset in an emerging market and force appreciation through repositioning.  Then you can refinance this appreciation and start the process again.  You want to  velocitize your cash just like the banks do

You can do it, but the asset has to be bought correctly

Gino

Ned Carey · Answer

@David White baltimore is not hard to figure out if you are driving the streets. You will see areas, generally closer the the edges of the city, where neighborhoods are consistently good. You will see other areas that are literally block by block.

It is not hard to figure out the good blocks. You will see nicely manicured lawns and homes general in decent repair. You can go 1 block and see trash, weeds in the cracks in the sidewalk, and properties are obviously in less good condition. It is not hard to figure out.

What is it to "know your market?"

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A Story About Knowing Your Market

The 100 House Rule