REI Competitive Advantage - Is Serge Right?

Question

My fiance and I are under contract on an incredible double around Cleveland, Ohio (Lakewood). I'm an economist and have a business background and found what Serge said about competitive advantage to be very compelling. In a BP podcast, Serge Shukhat said that competitive advantage is actually required to get significant returns.

This is very interesting to me as the doubles in Lakewood, Ohio are literally like a commodity in that they are all very similar in size and in most other characteristics as well. For example, most of them have about 1000 sf per unit and with small bedrooms.

The property we're buying was a lot more money but has A LOT more space. I found the the rent potential outpaces the mortgage growth as you move up the price ranges of the house. This fact blew me away because I always assumed the property had to be dirt cheap.

Is anyone else out there dabbling in a more rare type of property? I'm very exited to discuss niches and opportunities that require a bit more digging than what is on the surface.

What do you say @Ben Leybovich ?

Thanks!

Cary

Ryan Arth · Answer

@Cary Ferguson Jr @Joel Owens This is exactly what we are researching on the West Side right now. Specifically building a multi unit / mixed use out of repurposed shipping containers. while it is a bit of a niche, but the cost to build rivals current per unit pricing in the market.

Joel I saw your talk about NNN in Oakland, thank you for the information.

Arlen Chou · Answer

@Cary Ferguson Jr I believe you are mixing up the ideas of "competitive advantage" and "product differentiation".  A competitive advantage is by default a skill set or trait that makes "you" more competitive.  An inanimate object cannot have a competitive advantage as it cannot compete without direct input from a user. The fact that your unit, or more appropriately defined as your "product", is bigger or better does not in and of itself make "you" more competitive.

The ability to create a better product is definitely a competitive advantage.  The skill to make that product nicer at a lower cost or faster is definitely a competitive advantage.  The connections or negotiation skills you have to buy a property off market or at a lower price then everybody else is a competitive advantage.

An everyday example of product differentiation vs competitive advantage is the highly contested smart phone market.  Apple's advantage is not the iphone or what it can do.  On a feature set basis, I would argue that the Samsung S7 is just as good for most people then an Apple product, maybe even better for some consumers.  The competitive advantage of Apple is the ecosystem they created for all of their products.

It sounds like you have a nice product and I hope that it does well for you in your market.  I don't know if everybody will agree with me on my definitions, but those definitions work for me and my business model.

Regards,

Arlen

Ben Leybovich · Answer

So, yes - nicer units capable of attracting higher rent is a plus. I am not sure if I'd necessarily stop there. On one hand, bigger units should bring in more rent, but on the other hand you paid more for them, so they better :)

On one hand, larger units should rent faster, but unless they rent faster at much more money, your increased maintenance and CapEx will eat into your bone.

On one hand, nicer units should attract better tenants. But, on the other hand, people with $1,200 to blow - do they want to be neighbors with people who can only afford $700 for a smaller unit?

On one hand, you could make these really nice, and keep them nice. On the other hand, everything from paint to flooring will cost more because these are bigger units.

You see? So the gambit pays off, perhaps, if you can indeed get much higher rents. But, the competitive advantage  would have been really materialized had you been able to get these bigger, nicer, and potentially higher-renting units for the same price everyone is paying for the other junk...

Makes sense?

Cary F. · Answer

@Matthew Whelan

Interesting things to consider in Ohio City & Tremont. For one they're not as safe as Lakewood yet the demand from young professionals is very strong. But if you don't want your car windows smashed in or shit stolen off of your porch, go to the west end of Lakewood.

It's not uncommon for people to get held up at gunpoint in Tremont, Ohio CIty and Gordon Square. I've had friends get robbed in 2 of those places. Also 2 years back, there was a major auto theft problem in Tremont and Ohio CIty. The biggest problem you have in west Lakewood is someone's dog barking too loud once in a long while haha...

Joel Owens · Answer

Cary have you analyzed what it would cost to buy a land lot and build new versus buy existing? You might get the location you want, the rents, and the equity built in you couldn't otherwise buy with an existing property in your market.

Matthew Whelan · Answer

@Cary Ferguson Jr  Thank you for sharing. These are all the same areas I was considering. Although I think the right deals might be harder to find in Termont and Ohio City than Old Brooklyn and Lakewood.

Cary F. · Answer

@James Wise

Great points and great questions. I would say that my competitive advantage as an investor is that I'm an economist and that I work in risk management analytics. These skills provide a different perspective on REI.

The competitive advantage I'm referring to with this specific property has to do with product definitions and differentiation. I'd say that 80 - 90% of Lakewood doubles are very similar to one another and are therefore commodity-like in nature. The problem with commodity-like products is that your rent potential is somewhat controlled by your competitors who own similar properties. This competitive pricing can have an adverse impact on rents, especially in a bad economy.

The double we're buying is not only large, but is also very unique. Everything from the brickwork to the architecture is just different...   It's one of a kind. Now I haven't tested my hypothesis yet so I have some validation work to do. But I think that I can enjoy higher margins and better tenants with a large, unique duplex that is surrounded by near-identical duplexes. Plus I won't have to bow down to the prices of my competitors in Lakewood.

For now it's a lot of theory that I enjoy thinking about. I'm hoping to validate these theories and perhaps build my own niche in the market. Please reach out at any time if you want to discuss REI or different properties around town. I'd definitely like to get your perspective on things as you've had so much success with your business.

Thanks,

Cary

Zach Quick · Answer

@Cary Ferguson Jr I understand what the term means, thanks.

I suppose a nicer property can be an advantage in pushing rents before a non-nice property. You will also probably attract a nicer tenant, yes.

On the same note, if I go buy the nicest 3/2 in my town on the market and rent it out, is that an advantage?

I guess my point is, if you overpaid for the property or didn't buy it "right" then is it really an advantage?

Zach Quick · Answer

@Cary Ferguson Jr I think Serge was more speaking to his competitive advantage being to the management that he can pull off in his area.  I don't see what is an advantage in your property.

If you found it because of a special relationship with an agent, specific direct mail, you can fix up a unit cheaper than most, etc. then that may be a competitive advantage.  Unless I'm missing something I don't see how buying something without a great exit is an advantage...

Cary F. · Answer

@Ryan Arth

Sounds pretty awesome. Definitely let me know how it's going for you. I want to get into mixed use sooner or later as I'm involved in another cash flowing company and would like to be my own tenant. Cheers and good luck.

REI Competitive Advantage - Is Serge Right?

Most Popular Reply