I had an amazing conversation with Stephen Roulac, who is a scholar from Harvard, an author, a startup advocate, and investor. He has a track record in systems development in the real estate business and he explained to me that the dominating factor that drives your returns is the idea behind the deal.
Through his research, Stephen discovered that the amount of value created and the returns obtained in a real estate transaction are directly correlated to the idea behind the deal. While factors like arranging financing quickly, getting approvals, managing the construction budgets, setting up marketing and sales, and finding great property management all need to be solid, the real money is made from the idea! Simply put, deals that work come from good ideas, while deals that don’t work had bad ideas behind them.
A good idea behind a deal comes from the combination of the answers to 3 main questions:
- What markets do people want to be in?
- What property types work best in the specified market?
- What business model works best in the specified market?
A decent property in a strong market will way outperform the best property in a weak market. For example, Stephen had a client that purchased the best office building available in the Los Angeles market. It was in a good location, had beautiful finishes, great architecture, and the best tenants. However, they neglected to determine if the property type and business model were an effective investment vehicle in the LA market at the time (it wasn’t), and as a result, the client lost a lot of money on the deal.
To effectively select the correct idea, Stephen advises that you take the time to perform a Strategic Market Selection. With a Strategic Market Selection, you want to determine what is going to best drive the market performance by answering the following questions:
- What are people looking for in that market?
- What do they want?
- What is important to them?
Since Stephen is investing in very large deals, the factors that his target clients are looking for are highly urbanized, the presence of technological innovation, and lifestyle design.
For investors looking to purchase SFR’s or small multifamily, the target clients will more than likely be looking at factors like the quality of schools, access to transportation (both public transportation and walkability), and sense of community. Keep in mind that is will vary depending on the market, and the respective property types and business models that works best.
Once you determine what your target cliental is looking for, what they want, and what is important to them, you then want to find which markets offer those. List out all of the different markets available that meet this criterion, and then pick the best one that fits your specific goals. Finally, within that selected market, evaluate each property you are confronting, give them a score based off of your target clients criteria, rank them from highest to lowest and start putting in offers
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.