What does “know your market” actually mean?

Question

Over and over again people on the forum and podcast say that to be a successful investor you must know the market or be able to analyze a market. I want to open up for discussion on what that exactly means and what steps you all follow to “know the market”.

Account Closed · Answer

It means a lot. You have to know what properties will sell for, how much crime, what upgrades people are looking for, demographics, MLS competition, percentage of renters vs owners, is the neighborhood on the way up or way down, employment, tenant laws, etc

Alexander Felice · Answer

I can look at a property in my market on Zillow and in 20 seconds I'll knowclose estimate of ARV (+-5000)close estimate of rehab (+- $3000)What I do and don't need to rehab to get it rented for what I wantHow long will it take me to turnaroundif it's an area I want to be in for the long runwhat the rents will be (+- $50/month)what I should bid on it RIGHT NOW how does this happen?analyze every deal new to your market every dayknow what your fellow investors are paying for properties, what they rent/sell forhave a ground team to give you input (property manager / realtor) for market conditionsafter a while it just becomes second nature

Robert C. · Answer

@Josh Thompson, Your in-depth knowledge of a market will develop over time as you take each step towards buying your first few properties. I think you'll find it's a layered learning experience - speaking as someone who invests locally.Initially, you'll decide what numbers you want to achieve, and look at properties online or in person to see how achievable your financial goals are. That will give you the first impressions.Then, I think the first big leap (and dose of reality) is starting to put in offers. Once you put in a handful of offers that get rejected, you'll start figuring out where the market actually is (not just the ask price). And you'll start getting a feel for what you're actually willing to accept to close a deal in a particular market.Once you land your first deal, then your knowledge levels up again as you deal with rehabbing/timelines/property management and the ultimate return on investment after completing the physical work on the property. And this will influence your market assumptions for future deals. Some of the knowledge will be retained the first time, and some of it will need to be beaten into your skull as you repeat some of the same mistakes again the next time!Eventually, you'll be able to eyeball opportunities, but you will still have to keep repeating the same steps for any given market if you want to maintain the knowledge as the economy shifts.

Frank Wong · Answer

@Alexander FeliceHit it right in the head with his comment. You need to be in a position of knowledge of your target market to look at a deal and quickly analyze it and determine if you want to spend more time on it. How do you get to that point? You gotta look every day and start getting familiar with current sales, pending sales, sales of completed rehab homes, etc. Don't waste your time with Zillow estimates. Those values are based off an algorithm which no one really knows. Real estate is not all about data and ppsft. There must be a human element to determine what the true value is. A math formula has no idea what the layout of the home is, has no idea if it has a new kitchen or bath, cant determine if a remodel job is ugly or nice. These things matter when determining value. These are things that can only be determined by you. To me evaluating price and ARV is the most important step.

Kyle Mitchell · Answer

@Josh Thompson knowing your market is definitely subjective but to me it means not only understanding the economics of the market (macro) but also means the ability to know intimate things about the market (micro). Meaning not just that the crime rate is x% compared to the US but which pockets of that market is the crime higher and which areas are lower. Where exactly is the path of progress? What are the cities plans to develop and where? My experience is if you are going to really understand a market that is out of your area you need to make it a point to visit that market frequently and get to know other local investors who you can build relationships with to intimately understand and know the market over time. Hope that helps and good luck!

Josh Thompson · Answer

@Robert C. I am actually closing on a condo this Monday and have to say, The whole process of putting in offers and discussing with agents was the most valuable learning experience I’ve had so far.

Josh Thompson · Answer

@Kyle Mitchell Thanks!

Josh Thompson · Answer

@Alexander Felice Do you have a process you follow to to learn a new market or is it just a matter of doing research on the MLS until you feel you know the market? For example, are there certain websites that are valuable resources in giving demographics about an area (that are accurate)? I know sites like Zillow will give median sales prices and things like that, but I’m always hesitant to believe they’re reliable numbers