August 1, 2022

JF2890: Top CRE Market Selection Tips & Insights | Round Table

Each week for the Best Ever Round Table, the three Best Ever Show hosts — Ash Patel, Slocomb Reed, and Travis Watts — come together for a deep dive into a commercial real estate investing topic.

In this episode, Ash, Slocomb, and Travis share their insights when it comes to commercial real estate markets. They discuss which markets they invest in, their takes on local vs. out-of-state investing, the importance of selecting the right markets, metrics they use in their own market selection process, and the best-performing markets they’ve each invested in.


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Travis Watts: Welcome, Best Ever listeners, to another episode of the Best Ever Round Table. I am joined by Ash Patel, Slocomb Reed. I am Travis Watts. Every week, the Best Ever podcast hosts get together to talk shop, we talk real estate, and today is no different. We are talking about real estate markets. So we all invest in different sectors and different markets. So let's give the Best Ever listeners some insight into the markets that we invest in, why that is, and what to look out for when it comes to investing.

Slocomb, I'll start with you, if you want to give a quick recap background of who you are and what you do. And let's start with the question of investing locally versus nationally, or even internationally, how do you invest and what's your take on local versus out-of-state investing?

Slocomb Reed: Absolutely. Thank you, Travis. Best Ever listeners, I'm Slocomb Reed. I'm an apartment-owner operator in Cincinnati, Ohio, and that's the beginning of my answer to this question. At present, my home market is the only market that I'm in. I kind of backed into real estate investing. I think you've heard me say by now, most Best Ever listeners, that I was a house-hacker who got into real estate full time and happened to do that in a great cash flow market at the beginning of a long bull run in a real estate market cycle. So my backyard is great for cash flow, which made sense for cash flow investing, which is what I have personally focused on the last several years. So naturally, as an active owner-operator, my primary focus right now is Cincinnati, because now that I have management systems in place and I have a team, I can pick up a four-unit because I got a great deal on it, and I don't have to worry about scale, because it's 10 minutes away from other things that I already manage. That scale of my portfolio here in Cincinnati makes it a lot easier to take down a variety of deals.

I do suspect that I'll get to the point, maybe in a couple of years, where I want a second market, that I will want to be active as an investor and build out a team, build up new systems... And I suspect that it won't just be Indianapolis, Columbus, Louisville, someplace close by because of the similarities between those markets and Cincinnati. I may decide I would rather go for an appreciation market or someplace that sees more volatility, both positive and negative, like the Southwest. Phoenix is a classic market for that. But yeah, I invest in my backyard because my backyard happens to be a great place for cash flow, and cash flow is what I was looking for. If I go to a second market, it'll be a second market that has different characteristics and is not just another mid/major city in the Midwest.

Travis Watts: Those are great points. And one quick thing I want to add to that is when I was doing single family out in the front range of Colorado, it was so scary to think about investing out of state, because the only way I could comprehend that was I had to be the person who would go travel out of state and find the property and deal with the turnover and deal with the management. So to your point, I love what you said about systems. You can absolutely put systems in place, utilize other people... This is a people business. This is a team sport. And that's a great thing to keep in mind if you're going to do what you're intending to do potentially in the future. So great points.

Ash, a little background on yourself, what you do, and what's your take on local versus out of state.

Ash Patel: Yeah. Thanks, Travis. Ash Patel. I've been a full-time, non-residential, commercial real estate investor for over 10 years. And like Slocomb said, Cincinnati is great for cash flow and all I've ever invested for was cash flow. I've never banked on appreciation. So I too started out in Cincinnati, and I self-manage everything, but slowly started building bigger concentric circles, and now it doesn't matter where I buy, whether it's Atlanta, Florida, Texas. I've even bought properties sight unseen. And again, I self-manage everything. So with retail properties, office buildings, once you have systems in place, it's not terribly difficult to self-manage remote properties. Population growth is one thing that I like to have. I don't always achieve that. I certainly don't want large population declines. So yeah, really, I'll buy for the right deal anywhere.

Travis Watts: Awesome. Love that. Great insights. To piggyback on my previous comment there about investing in the front range of Colorado - so one thing that got me a little uncomfortable as I was scaling up when I was doing the single family stuff is having all my portfolio within about a 30 to 35-mile radius, and I thought - there's a lot of different forms of risk. You have natural disaster risk, you have political risk, and tax risk. There's a lot of different risk; employment, obviously, and population, to your point. And I thought, what if one day, just speaking hypothetically, someone gets in office out there in Colorado and says, "We're going to implement a 15% state income tax out here"? [laughs] That's going to drive people in businesses right out of there, and I'm going to be left holding a bag of who knows how many properties. So the beautiful thing about being a limited partner in different syndications is you can handpick the markets you want to invest in, and it truly is just a turnkey model. You're not having to do the heavy lifting. Most of the properties I invest in, I've actually never been to or seen, and I'm certainly not dealing with the tenants, toilets, termites, and things like that.

So I've been a Sunbelt market investor for about almost seven years primarily. Nationally, the stat suggests that Sunbelt has outperformed the national averages for at least the last five years. I know that's true. So that's how I tend to invest, generally speaking. And oh, I didn't give an intro... Travis Watts, full-time passive investor and director of Investor Relations at Ashcroft Capital with Joe Fairless.

So with that in mind, great points, you guys. Let's move into why markets are so important. So what percentage of the overall success, when it comes to being a real estate investor, would you say is attributed to the market, versus the deal itself? Ash, we'll start with you and go in reverse order here.

Ash Patel: Good question, Travis. One of the things that we have on our due diligence list is figure out what the city council is all about. So in towns where city councils are cohesive, they get along, they actually accomplish things at the meetings - those are towns that are progressive. When you go to a city council meeting and there's infighting, the two sides, us against them - those towns are often stagnant, and in my experience, that sets the tone for growth in that area.

So that's one of the biggest things that I think very few people ever look at. Either see if you can go to a city council meeting in person. If not, see if they're recorded. If not, call up the city council, call up the mayor, call up the city manager. And I always ask that question, "Is the city council divided, or is it cohesive?" And anything less than, "Oh, it's great", means it's divided. It's like, "Ah, you know, we're getting better. It's amazing." It's a great litmus test for the town's overall health in terms of growth. So that's one of the biggest things we look for in terms of markets.

Travis Watts: Awesome. I've never actually done that. All I could do back in the day to bring myself to an HOA meeting and I just hated it every single time. [laughs] That's [00:09:48]

Ash Patel: Yeah, they can be rough.

Travis Watts: That's as involved as I got. Yeah. They--

Ash Patel: They're usually entertaining.

Travis Watts: [laughs] To say the least.

Ash Patel: Yeah.

Travis Watts: So Ash, what percentage would you give then to the market itself versus the deal, if you had to break it down that way?

Ash Patel: That's a good question. We've walked away from deals that were 35% cash on cash on $6 million deals because of the city council issue and negative population growth. So I would say 50/50--

Travis Watts: 50/50.

Ash Patel: Right around there.

Travis Watts: Makes sense.

Ash Patel: If we were on the fence, we considered going through with it... It just-- yeah, that's a tough one.

Travis Watts: Yeah, it is for sure. Slocomb, your thoughts.

Slocomb Reed: Those are some great points. I love that thought about the city council as well when it comes to tracking growth and what is and is not going to happen in a space. What I love about this question, Travis - it's a lead-in to address an issue that I see a lot of investors having, and that's confusing their macros with their micros. I know a lot of investors who tend to mmet more passive or active apartment syndicators who are looking at a lot of different markets, who want the market data to dictate where they invest... That's focusing on the macros. The micros is how you're actually finding a deal, how do you analyze, how do you recognize you have a deal, and then your actual operations. It's a lot like-- I'll use football as an analogy. You need both the macros and the micros. The macros are like the scouting report that you have going into the game. You've watched film, you have an idea of what your opponent, in this case, or your investment or your market is going to do. And then the whistle blows and you actually have a defense in front of you and you have to figure out how to score points. And that's the micros.

Tom Brady knows how every game is going to go in his head before it happens, and has come from behind to win more super bowls than anybody else, because he had a good scouting report, but he also had the ability to adapt to the micros of the individual plays, blitzes, things that he was seeing from a defense when he finally got onto the field. I think you need both. You can execute poorly in the best market for your strategy, and you can execute amazingly and find a great deal in a terrible market for your strategy.

One last point here, I just came through a string of interviews for the Best Ever podcast with investors in California; and not just California, but Los Angeles and the Bay Area and San Diego, who are seeing great success, because even though they have a really difficult market to invest in, they take advantage of that higher barrier of entry, both capital and expertise, to find the great deals that they, because of their quality micros and their own investment strategies and experience, they're able to capitalize on. So it's not just the market. The market gives you a good baseline to let you understand what you can expect - is it cash flow, is it appreciation? Is it high-end? Is it affordable? But then you have to execute. The execution is based on you individually and how you perform on your business plan.

Travis Watts: Love those thoughts. Love the macro versus micro. I always say you have to be able to zoom in sometimes, but also zoom out. Same thing, different words. There's a story of these guys that get in a plane wreck on a big island. They're right in the heart of it. It's jungle, it's thick [unintelligible 00:13:08.16] their machetes and everyone starts whacking away trying to get out of there, and one guy decides to climb up the tree, and he goes, "You guys are doing great down there. The only problem is land is this way", or the ship, or whatever, you know. So everyone's going the wrong direction. So you've got to have a little bit of a macro sometimes as well.

I've always said, in my opinion as a limited partner in syndication, my personal thoughts are 25% is the market of your overall success, 50% is the operator, 25% is the deal itself. That's my personal breakdown. And I can give you a couple examples of that. I was in a deal years ago in Atlanta, Georgia, which at the time was a great market. Still is a great market today. It was booming. It was growing. It was expanding. This operator bought a good deal, at a good price, at a good time, but they completely failed to execute their business plan and the overall results, as far as the returns - they were half of what they originally projected. So that's where I kind of put a weight of 50% there. That's not the only deal that made me come to that conclusion, but that's an example.

Another example would be if you take a declining or a stagnant market, some Podunk town in Oklahoma out where I'm from, not near a city center - you could find an off-market deal at an excellent price. And if you can keep occupancy and collections up, that could be a heck of a deal. It could be a great cash-flowing deal. You might even have some equity upside, even though the market is kind of trailing down.

So there's a lot of creativity to it. You guys have the upper hand being active, whereas I'm the LP in these deals. So a couple things, food for thought. So what metrics do you guys look for in a market before you decide to invest? We'll start with you, Slocomb, and reverse order again.

Slocomb Reed: Absolutely. I have to answer this when it comes to submarkets within Cincinnati, because Cincinnati is the only market that I'm actively looking for deals in. In part, it depends on my partners. I have some Class A, high-end, they want nice finishes and they want to pay high rents. I have some properties in those neighborhoods and I have properties in neighborhoods that just want to stay affordable. More on that, I believe, on a question that's coming up...

But what I'm looking for in a submarket is where does the cash flow come from? And is there appreciation potential that I want to try to capture for cash out refi down the road or something like that? And the question with where does the cash flow come from is in - let's call them C-class neighborhoods. The cash flow comes from streamlining your operations to match the affordability that the tenant base wants. How do you make sure that you deliver a quality home affordably, so that you're profitable with an affordable rent? Streamlining your operations, making sure you know what it is that the tenant base cares about and doesn't care about, so you're not spending money in the wrong places.

There is still cash flow in Cincinnati in the nicest neighborhoods around, because of what's happened to rent rates the last couple of years. We're recording in mid-July 2022. The cash flow comes from making sure that you are spending money in the right places to get the cosmetics, to get the upgrades, the updates, the amenities that your tenant base is willing to pay a premium rent for. Those premium rents are still producing cash flow, even in the Class A sub-markets within Cincinnati.

Break: [00:16:28] to [00:18:14]

Travis Watts: Ash, your thoughts.

Ash Patel: Yeah. One of the first things is population growth. If you have a stagnant or declining population, all of your business tenants are at their highest and best, and it's only going to go down from there. So population growth is definitely one that we look for. Job growth in the area... Whether it's immediate or nearby; that just means more commuters could potentially go through your property. Crime statistics. We always call the chief of police wherever we buy, and we ask them specifically about this property. What kind of historic crimes have happened there? If they have to patrol a lot, if there's any trouble spots. If you're buying a giant strip mall and maybe there's some dark corridors, find out if that's where all the kids hang out at night and that's where things happen. So population growth, job growth, crime statistics.

Household income is a unique one, because it doesn't matter what the household income is, we just want to make sure the property that we buy is appropriate for that. So if you buy a Class A property, household income is relatively low, it may not be the ideal thing to buy. If you're buying a strip mall with mom and pop businesses and maybe their ethnic businesses and that population around there supports that, perfect. So in a largely Hispanic area, if you buy a Hispanic grocery anchored store with a bunch of other businesses that cater to that culture and that population, perfect. And then basically, household income is a five-mile radius. Anything beyond that doesn't really matter. So those are the key statistics that we look for.

Travis Watts: That's awesome. And as an LP, anybody listening who's an LP, I would take some notes on what Ash just said, and ask the operator some of those questions. See if they're doing that form of due diligence. Because it shouldn't necessarily have to be on you as the LP, right? They should be doing their own due diligence. So those are great points. Do you put any emphasis, Ash, on school ratings? I hear that a lot, people looking at how good the schools are in the area.

Ash Patel: No, because that's more on the residential effect. I don't care what the schools are. Obviously, the nicer, the better, but we look for - traffic counts is another one, right? So I should have mentioned that earlier, but traffic counts is one of the primary indicators we use. And then figuring out if it's commuter traffic or all day traffic. If it's commuter traffic, it's people on their way to work and home from work. Coffee shops might be nice, breakfast places or fast food places on their way home. You don't want a lot of sit-down restaurants on commuter routes. You want convenient types of stores. So yeah, schools - I don't know that we've really dove into that ever.

Travis Watts: Yeah. It's huge in residential. That's why I ask, because I'm not in your market sector. Very cool. Alright. Well, for me, a lot of what you guys already said, migration, companies, where are people moving? Why are they moving? Their landlord-friendly laws, low to no state income tax. Ideally, I've done a lot in Texas and Florida. For those reasons, more affordable housing compared to most other states is another factor and diversified employment. At the end of the day with residential multifamily, it's all about jobs, it's all about income, it's all about employment. And so you don't want to be in the Detroit sector right next to GM, leading up to the great recession, and everyone's losing jobs and therefore you're losing tenants and you're losing rent. You want to have - like Dallas; I don't know if it still holds true - no more than one sector comprises 20% of the job market. So you have a lot of different forms of employment out there, just to use that as an example.

So we'll move on from that. Slocomb, we'll start with you on this one. What's been your best performing market? [laughs] Obviously, we've heard that you're in Cincinnati there... And why? Tell a story if you have one and just some things that stood out to you, or stand out about Cincinnati.

Slocomb Reed: Absolutely. Thank you, Travis. So I'd like to, within Cincinnati, dive into submarkets again. I don't need to name neighborhoods, because that won't be relatable to a lot of Best Ever listeners, but the differentiation between Class A and Class C apartments within my own portfolio... I was asked recently at a coffee with an investor who I just wholesold an apartment building [unintelligible 00:22:33.29] units, what's my favorite property right now? And I hadn't actually thought about that question in a while. It's one of the boring ones. It's a 24-unit in a C class workforce housing neighborhood. And the reason it's my favorite is because I've got it figured out. It's steady cash flow. It's great. I have my systems in place. I keep the rents affordable. I've learned not to try to push the rents in that neighborhood, because that's not what the tenant base is necessarily looking for... And I can focus on streamlining my operations, streamlining my renovations, only spending money on the things that tenants in that tenant base care about, and I've got great occupancy. The rents are still going up. I'm just not as aggressive there as I am in some other places with my rents, because I have figured out what the tenant base wants, what they're willing to pay, what they're willing to pay for, and I've been able to marry that to the operation of that apartment complex.

Other side of the coin, just real quick - my first few properties, small ones, three and four-family buildings, I bought in rapidly gentrifying areas, and I fell behind the gentrification in those neighborhoods. Rent rates have increased dramatically in the several years that I've owned in these up-and-coming and now Class A neighborhoods, and my properties fell behind the curve. I didn't have the amenities and the cosmetics that tenants were demanding. So I had $1,100 a month rents when $1,500, $1,600, $1,700 a month was possible. So I'm just now in the process of getting in unit laundry in every unit, upgrading those kitchens and bathrooms, making sure I have great floors, upgrading the paint that I use... There's a big difference between $1,100 and $1,600 a month in an apartment. I'm in the process of figuring out again how to do Class A apartments, because I fell behind the curve, unlike - I've got my Class C stuff streamlined and cash flowing great.

Travis Watts: Love that. To the first part of what you said there, I always say boring but effective. That's my favorite. Rinse and repeat, double down on what's working. You can coin your own saying or phrase. Ash, best-performing market and why, any stories you may or may not have.

Ash Patel: Yeah, best-performing properties for me are all in the Atlanta suburbs. Whether it's flex space, strip malls, they're just on fire, and I think part of it is population growth; it's booming down there. Some of those areas that we're in have phenomenal school districts that literally draw people in from out of state just for those schools, and those schools are centered around sports. So everything around Atlanta that we have is just on fire.

In terms of if you want numbers, properties that we've purchased, value-add flex spaces, have doubled in value in about a year, but that also comes with filling vacancies, increasing tenant quality. Strip malls - close to doubled on a two and a half million dollar purchase; it's the same thing- increasing the quality of tenants, signing longer, better leases. So yeah, Atlanta has been phenomenal.

Travis Watts: Yeah. I continue to invest in Atlanta. I know Joe and Ashcroft, they continue buying out there as well. What a shame to that story I shared earlier on that Atlanta deal... All we had to really do is hold it for the cash flow, and today it would be more than double up on what we paid for it, to your point.

So some of the best markets that stand out to me as an LP - Tampa, Florida. I've done a few deals out in Tampa. Tampa, I believe, had the highest rent bumps last year in 2021 of anywhere in the nation; it was upwards of 22%, 23%. So those have been performing very strong. One actually just sold. We did very well on that.

Orlando, I'm out in the submarkets of Orlando, just single-family and multifamily. It's been crazy and booming out here. A lot of people think of Orlando as just a tourist. It's really not. There's so many sectors coming in here. It's just unreal. Made an episode on market highlights on the Actively Passive Investing show, if you're interested in Orlando. And I would say, last but not least, Phoenix. I was an LP in a deal out in Phoenix. It was Glendale, I believe. And we had almost a 40% IRR; that was several years ago, and it just has continued to shine.

But do keep in mind that sometimes markets do get overheated, markets do shift and evolve and sometimes new development comes in and changes the game. So you've always got to kind of be up at least with a macro, even as an LP on these deals.

So last question, you guys; we'll drive it home. Ash, I'll start with you - if you were going to invest in a different market sector, I'll let you choose what sector, whether that's short-term rentals or hospitality, or even residential, would you change your market? If so, what market would you choose for that sector?

Ash Patel: Man, if I was to invest in residential, which I don't do now - yes, I would certainly be in the Sunbelt states, probably where a lot of your LPs are, and I would do Class C properties just to mitigate the risk. So a combination of what you and Slocomb are doing. But I'm going to stick with commercial.

Travis Watts: [laughs] We'll have to do a debate coming up. I'll leave that up to Slocomb. I know he wants to beat you up over that. Slocomb, your thoughts on what other market sector would you choose and what market would you associate with that if you were to try to have the most success in real estate?

Slocomb Reed: Yeah. I would likely end up in retail smaller scale, retail strip centers, things like that. I don't know that I could name a Metro area. I might actually try to find tertiary markets where I can gain an informational advantage. There are some smaller towns and smaller neighborhoods or suburbs in Ohio, in the Dayton area. I grew up in Springfield, Ohio. And I could gain an informational advantage in a smaller market with fewer competitors, much faster than I could going to the suburbs of Atlanta like Ash is. There's going to be more competition for the kinds of deals he's doing there than in tertiary markets. And even in Springfield, Ohio, people want to eat at Subway; they need to get their taxes done. They want to go to Lowe's. They go out to Mexican restaurants and Olive Garden, and there are opportunities in places like that, that I would likely be looking to take advantage of.

Travis Watts: 100%. So I'm going to choose short-term rentals, because I want to share a story with that. So we just, coincidentally - my wife and I years ago happened to be living in the heart of Denver, and we had this old Tudor home, 1932 style home, with a separate outdoor entrance to the basement, so it was completely isolated. So we threw that up on Airbnb and we undercut the market rent and the hotels. This is before all the licensing and rules came into place. It was kind of a Wild West. [laughs] And man, we did phenomenally well on that, and I always kind of wonder if I had properly scaled that business model; if I had actually put systems into place like you two have done, if I had stayed active, and if I had scaled out at that time in Denver. The market was just booming and has continued to boom, and it does so well in these major Metro markets.

But my dad, for example, he was wanting to mimic what I was doing, but he lives in Greeley, Colorado, and that's about an hour and 15 outside the city. No hope. No one's going to be renting his basement out in Greeley, Colorado. [laughs]. So I would definitely choose those major metropolitan hubs. I would probably choose short-term rentals. And to remain as passive as I could, I would put systems in place. So that's probably what I would try to do.

So with that, I appreciate both of your thoughts. This was a great episode. Thank you, Best Ever listeners, for tuning in. Like, subscribe, comment. Share these episodes with someone you think might find some value from them. Stay tuned next week. We'll be back. I think, Slocomb, you're hosting. I don't know, but stay tuned. It'll be a great episode. And we'll see you next week.

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