There are no "bad markets", just bad strategies / operators?

Question

I've been thinking about this a lot. We focus in one market (Los Angeles), and have a strategy that has thus far worked. I've had folks tell me the market we're investing in is a good place to by real estate, and others tell me that it's a terrible one. I've heard the same about Cleveland, Tampa, New York City, Phoenix, Detroit, and every other metro area in the country.

This got me thinking. I know someone who is based in and operates in Detroit (which gets beat up on constantly in investing circles), doing flips and the BRRRR strategy for medium term holds. He's done very well, by any measure of returns. Yet, I'm sure others in Detroit, using the same strategy, or a different one, have had trouble. Know folks in Cleveland with similar situations.

Locally, in LA, I've seen folks get burned, despite how "good" of a market we're in. Often, their strategy was off, or they didn't execute well.

So, this raises the question: Are there any "good" markets? Or, is that different for each person? My view has been that the operator and the strategy is at least as important as market, but open to hearing otherwise.

Joe Splitrock · Answer

Nothing is good or bad. That determination is an opinion and is highly subjective. I see investments as having five factors:

1. Risk

2. Effort

3. Cash flow

4. Appreciation

5. Time

These factors can be influenced through strategy and skill of the investor. For example, a skilled investor could reduce risk, reduce effort, increase cash flow and increase value on sale (appreciation). However, these factors are also affected by the market. I can have the best house in the worst market and it may be worth less than the worst house in the best market. This is why strategy and skill are important.

Levi T. · Answer

@Shiva Bhaskar It’s down to the three fundamentals: Entry Price, Time Horizon, Cost Management.

You can easily enter a market by having to high of a entry price to exit at your desired time horizon, just as much as one could mismanage cost, and end up with the same result.

Evan Polaski · Answer

@Shiva Bhaskar, as you mention, there are people succeeding in all markets, big and small, low crime and high crime, etc.

Investing overall comes down to finding a hole in the market and filling it.  But there are bad markets to invest in, and those are the ones you don't understand, or your strategy is not aligned with actual demand.

Joe Villeneuve · Answer

Yes, there are bad markets to invest in, but you are correct in saying your can cure "some" of them based on the strategies you use.

Also, don't the mistake thinking that higher sales prices and/or higher rents are what makes a good market.  All that does is make it an expensive market.  A good market is one where you make money either cash flowing, or flipping.

Shiva Bhaskar · Answer

Joe, I agree with you. The point about higher sales prices and higher rents is an important one. You find residential markets here in CA where prices are very high, and doing a rental makes no sense. Good for flips if you can find a fixer, but not otherwise.

I also think the reverse is true. Some folks see $40K houses and $700 rents, and look at cap rates and see dollar signs. Important to consider why the cap rates are so high, and prices / rents so low. Usually a reason, and it often goes to crime and population loss. Seems like flipping a better strategy in such an area.

Shiva Bhaskar · Answer

Thanks Lee! Yes, I know you're in LA as well, and I too see multifamily properties on the same block that are operated vastly differently. We can almost pick out, by driving by, the ones that have been maintained or perhaps changed hands to a new operator recently, and the ones that are being allowed to stagnate or even get worse over time. That's totally on the operator.

Lee Ripma · Answer

@Shiva Bhaskar I think the person/team doing the deal has a massive impact. I tell people, you and I could by identical properies across the street from each other and have very different outcomes. I attribute that to the operator not the market or property. I personally really want to create/get EQUITY in my properties. So I wouldn’t touch the cash flow in Cleveland. But for some they totally make that work and it’s incredible for them. Great post!

Lamar Lee · Answer

The acquisition and operating team make all the difference in buy and hold real estate, in any market. There are great operators in all markets, they are just tough to find if you don’t know what you’re looking for.

It also depends on what you’re investing for. I invest for cash flow so, Detroit is the perfect market for my investment strategy.

If you’re looking to grow a large portfolio of cash flowing real estate, you have to be in a market with enough inventory to scale.

You also don’t want to be in a market that’s too competitive. Competitive markets lack yield. As an investor, I love the fact that people are scared of what they don’t know when it comes to Detroit. It allows us to continue buying properties with excellent intrinsic value. A good acquisition and operating team will allow you to purchase income-producing real estate below replacement costs. That margin of safety, combined with great yield, make it hard to lose in a market like Detroit.

Brad Hammond · Answer

Hi @Shiva Bhaskar, me again.  I totally agree with this.  I grew up in Cleveland and my dad was BRRRRing before it was cool.  He never made very much money and had to have one of his properties foreclosed on in 2014 because the crime was so bad in the area.

On the other side, I invest in Portland, Oregon, and have tons of success.  While my properties don't cash flow as much as other areas, the appreciation makes me substantially more money.  I think it is so important to study the market and do what makes sense for that market.  Do the math and the math will tell you what to do.

Shiva Bhaskar · Answer

This is so true. I visited CLE in 2018 and was impressed from a cashflow standpoint, but older investors warned about the challenges too. It seems some folks doing flips there have done very well though. Portland is definitely a buy and hold market.

There are no "bad markets", just bad strategies / operators?

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