Analyzing A Market: El Paso TX

Hello again from Walter & Douglas at Blue Water REI!

We just wrapped up a quick weekend visit to the market we have identified as our investment market of choice: the border town in West Texas, El Paso. This was our first visit to El Paso, a crucial step for us being out-of-state investors.

The purpose of our initial visit was twofold: create relationships to build our investment teamand get “boots-on-the-ground” familiar with the El Paso market. Our business is built on team members and creating win-win relationships. Being remote investors necessitates a good team. Key team members we identified as needing in El Paso are brokers, property managers and local bank lenders; we focused our time this weekend on meeting with these three key individuals and assessing their viability as potential team members. Being in the market provides you as the investor, first-hand knowledge of how it’s laid out, the current apartment inventory and what parts of the city are most advantageous for investment. In this blog, we will explain the three main takeaways from our visit to the market.

1. Preparation Pays Off

We had a deliberate plan to prepare for this trip, which started several months before landing at the El Paso airport. Prior to our arrival in the market, we focused on: general apartment investing education, analysis of the El Paso economic and multi-family markets, creating a credibility book/business plan, developing a company website and an online presence through LinkedIn. We started contacting potential team members via email and phone in order to build rapport and set / confirmed our meeting schedule with those people which had the ability to add value for us and future our tenants. The results of this preparation were we had quality meetings with market SMEs who generously shared their knowledge because we were prepared and could hold a professional, intelligent conversation on what we want to accomplish. 2. No Substitute for Local Knowledge A significant amount of information can be gleaned from the internet in today’s information age. Websites and commercial companies such as CBRE and Marcus and Millichap have a lot of good data. However, these sources lack the detail necessary required to wisely invest in a market. Moreover, for secondary or tertiary markets, like El Paso, these companies do not provide the data and information investors require. Future team members are invaluable, and teams need to be built face-to-face in person. They provide the details you can’t get from other sources; provide the reasons why the market operates as it does; recommend investment opportunities and develop creative solutions to help you and your tenant. Lastly, they provide first-hand experience from operating in the market daily: rent-rates, expenses, marketing techniques, etc. 3. Every Market Has Unique Intricacies Which Impact Investment Strategy A key component of our investment strategy is to reposition a property by increasing the Net Operating Income (discussed in previous blog posts); the key to being able to do this is to increase rents after taking care of deferred maintenance, and correctly managing the property (both obtaining the desired tenant and controlling expenses). What we found in El Paso was that certain neighborhoods, which possess the highest concentration of class C apartments, have constraints on how high fair market rent can go. The ability to raise rent is extremely limited, which has a direct impact on our investment strategy. Many of these tenants in this neighborhood would be considered low income. Because of their inability to pay a typical higher rent and deposit, we need to be creative in the way in which we increase the NOI. One possible solution to this constraint would be to waive the security deposits (less burden on the tenant), but increase rent rates by $50-$75/month. By doing this, we are able to increase the property’s NOI, while eliminating the burden of the security deposit for the tenant (which doesn’t count as income when determining NOI of a property). A Win-Win solution.. There are specific challenges and opportunities with decreasing expenses in El Paso. A unique way to decrease expenses (again, positively impacting the NOI), is to convert swamp cooler systems to refrigerated air. Swamp coolers, which are prevalent among many of the older apartment buildings, are maintenance and labor intensive (therefore costly in repair costs). Converting these units to refrigerated air is a capital expense (not a repair) and therefore has certain tax benefits, in addition to decreasing the required maintenance and cost of keeping these units functional. Furthermore, refrigerated air may allow for higher rents and will likely be viewed as favorable by an appraiser. The specifics of any market will dictate how one evaluates and underwrites properties. Additionally, market intricacies will dictate available strategies to add value and increase the asset’s NOI. The Way Forward At the conclusion of this trip, we identified four next steps which will propel us closer to closing on our first apartment acquisition in El Paso: follow-up with those individuals we met; continue to build out our network in search for team members; consult with likely partners on a market-specific investment strategy; and lastly implement a process for analyzing deals.

As always, we are here to help! Shoot us an email or give us a call. And if you know anyone interested in our content or what we do in real estate, invite them to visit our blog! As we have said from day 1, it's all about the team!