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The Savvy Investor: Watchouts for New Market Investing

You may have noticed my absence Thursday and Friday, while I was in sunny Greensboro, North Carolina (sunny as oppose to Ithaca, NY). While the trip was a short four days, I met tons of contacts and had a very interesting introduction to the market. There are so many things to talk about, I am going to break them up by topic and try to write them up over the next couple of days. Today, I want to talk about the savvy investor.

I began the journey meeting my agent at the airport. I worked very hard in selecting an agent that I thought would offer me a good look at the market, with an objective opinion on pricing. My goal is to always try to choose an agent, who has experience in the market and is hopefully equally savvy (or more so).

The first problem I encountered right away was a language barrier. I thought cap rates were the universal language, so I assumed that all commercial pricing would be based on local cap rates. Wrong! My agent informed me that the pricing assumptions in Greensboro were based on an assumed appreciation rate of 1-2.5% a year. Interesting… As I stretched my mind to try to understand this concept, I made an assumption that rents would be increasing by at least that or that despite what I saw with my eyes there was a rush on small apartments in Greensboro. Of course, neither was the case.

Interestingly enough, when I made some calculations based on my own models most of the properties I looked at were in the 6.5-7.5% cap range. Although the rates seemed very aggressive for the Greensboro area, every property I looked at fell into this range. My next stop was a commercial mortgage lender. As I sat down in his office, I wondered if everything I had learned in life and in school did not apply in the town of Greensboro or if other investors were just plain crazy. I say this specifically because of all the properties I looked at only one of them was actually making money year over year.

At last, sanity arrived. The lender specifically said that cap rates in the area should be in the 8.5-10.5 range and that they were typically cash flow lenders. Additionally, he mentioned that many investors had refinanced and refinance appraisals tend to me far more aggressive than other appraisals. After several more reassuring local tips, I headed back to my realtor armed with more local knowledge. Taking the bull by the horns, I ran my cash flow numbers by her and let her know what I was willing to bid on the properties. And the dance begins. Unfortunately since my bids are 80% of asking (or lower) I am not sure they will be considered. Based on the time on the market data, I am hoping investors will be more eager to sell than their prices suggest. All of my bids are fair, data based offers and I have specifically let my realtor know they are my final offers. This is a strategy that I am testing, since I have never encountered an area with such high mispricing.

This entry is entitled the “Savvy Investor” because I can only imagine the trouble I could have gotten into out here if I was not prepared. Additionally, my initial thought when looking at the market and their practices was to pack up and get home early to save my weekend. Luckily, I had meetings scheduled with a variety of people: mortgage brokers, commercial lenders, other real estate agents, and local investors. Each person’s perspective added to my knowledge of the market, making me a more informed investor. After meeting with everyone, I am convinced that there is value here for the savvy investor, however; that value is going to be hard to find.

Key Learnings….

  • Never question what you know, but listen and learn as much as you can
  • There is value everywhere, despite what might appear on the surface
  • You are the only one who has your best interest in mind
  • Talk to everyone about everything.
  • Be patient. Never be so eager to jump into a market you forget what you know about the fundamentals of investing.
  • Take everyone’s perspective in context: Agents sell things, commercial bankers lend money (cautiously), mortgage brokers connect two parties, etc. Understanding motivation behind advice helps you weed out their spin on information.
Related posts:
  • Real Estate Investing vs. Stock Market Investing- Is there a Clear Winner?
  • Value Investing 101
  • Touchdown in Greensboro: What makes a good investment?

  • 4 comments

    4 Comments so far

    1. Phil Hoover January 30th, 2007 7:14 am

      Why do you want to invest there if the numbers don’t make sense?

    2. Michael Cook January 30th, 2007 7:22 am

      Why do you want to invest there if the numbers dont make sense?

      The simple answer is that I will be relocating to this market in a year or two. The more complicated answer is that I see positive fundamentals in this market. Based on my research, Greensboro is poised to take off over the next three to five years. They have had great investments in infrastructure, brought in several large companies (with more on the way), and have a declining vacancy rate. With the increase in foreclosures and the pattern of housing prices, I think multifamily will be very hot in Greensboro in the near future. By getting in now at the right price, I see a lot of upside potential. If I did not, I would certainly have not even considered many of the things I looked at.

    3. Jeff Brown January 30th, 2007 11:53 am

      Phil – The numbers don’t make sense for many of the properties I turn down in Boise. You see the same ones I do, right?

      Michael will buy some props there and absolutely kick major booty.

      And BTW Michael, you’re proving my earlier point about you being able to drop yourself into a new market and do very well. I wager you make a fortune there in the next 3-5 years. You and I both know that’s the safest bet I’ll make this year. :)

    4. JeffX January 30th, 2007 11:58 pm

      Michael…Sorry I didn’t get back to you before you made your trip to Greensboro…I’ve been adding more miles to my now gargantuan frequent flyer account (Vegas and Orange County CA)

      You got a first hand experience of G’Boro NC… a small traditional southern town with big city aspirations.
      You’re research is right on, in 3-5 years people will be asking how you ‘knew’.
      Property is very reasonably priced and poised for (further) explosive growth. Downtown is bustling especially multi-family…3 years ago if you told someone that in 3 years there would be $300K town homes pre-selling, most would have called you nuts. Its now happening with regularity.
      NW & NE Guilford County are SFR developing meccas…the influx of new people keeps increasing…

      Best of luck to you…