When reviewing real estate for purchase there are varying types of local market knowledge; knowledge of the physical asset, the property around the physical asset, knowledge about the market, the submarket and the people who live and work close by. How deep is your local market knowledge? The data can be segregated into four categories:
- The subject asset- the potential acquisition candidate.
- Assets adjacent to the site- those properties that share a lot line with the subject property.
- The submarket- an area represented by certain natural and competitive trade area boundaries.
- The market- generally represented by the city or metropolitan statistical area.
The subject asset. There are physical and financial dynamics to address during due diligence and then operational considerations post closing. Not one of these is any less important than any other part of the process.
Adjacent assets. What do you know about the assets surrounding the assets you own/manage or are looking at as a potential purchase? Do you know who owns the properties on either side, in front and behind? What do you know about the age, condition or occupancy of these assets? Would you know if they were for sale without having to wait on seeing a “for sale” sign out front? Knowing your neighbors by name and number is very important presuming you have an interest in acquiring adjacent property when it becomes available. Particularly if you want your neighbors to know you are a potential buyer.
Having names and telephone numbers can be important, however, the deeper question is really more about use and intended use of the property. For example, if neighboring properties as far as the eye can see are all single family homes there is a good chance they will remain so for an extended period of time. However, if there are varying uses occurring then zoning changes could potentially bring added competition.
The submarket. Once the submarket is defined, a multifamily property owner or management company has a very solid view of the population, income and competitive properties affecting a give apartment asset. Seldom is this area square or round. Nor does the shape or size follow census tracts or block groups. The shapes, sizes and area covered varies immensely.
A submarket is a geographic area defined by streets, natural barriers and the specific properties in which a property is in competition for customers.
Making a determination about population growth and income, and aligning this information with the number of housing and multifamily housing units will provide guidance about future vacancy and rent growth. These factors have significant impact on value.
The Market. Markets are distinguished by size and quality. A market is the place where a rental property must compete represented by established boundaries. A market represents a place and its surrounding infrastructure including physical, social and cultural places. A market represents a place where people work, worship and go to school. It is an aggregate location with a certain cohesiveness.
All of these local market matters add to your specialized knowledge about a particular property. Reliance on the “drive by” is no longer sufficient nor is talking with a few “locals” to get a feel for a place. The more you know the higher your comfort level in the buy decision.
Mr. Wilhoit is the author of three books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 & 2 – How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets. Multifamily Insight Vol 2 — just out!
About This Blog:
Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. See http://multifamilyinsight.com.