There’s a lot to do when it comes to prospecting investment properties. But before you get out there and pound the pavement or start looking through listings, there’s one all-important first step: Establishing your target investment market.
Shopping for a real estate investment with a strictly established target area in mind will help you stick to your business plan. More importantly, it’ll keep you focused on finding good opportunities.
Without a carefully selected target market, the sheer number of investment choices may overwhelm you. Too much choice is never a good thing. If you’re overwhelmed by different investment opportunities, you’re likely to make more impulsive decisions. Chances are, these won’t line-up with your long-term objectives or your investment goals. Lack of choices—or rather, a focused investment market—creates discipline.
It’s advisable to keep your first investments within the same target area, so it should be a market segment you’re extremely comfortable operating in for the long-term. Keeping several investments in the same target area allows you to develop strategies within that target market. Over time, that'll help you find your investment niche!
Why you should focus on a target area
Successful real estate investors always start out focusing on one very specific market segment. You should carefully define that segment according to your own industry experience and expertise. There’s a lot of benefit in honing your focus and defining your geographic parameters, including:
•Master your product type: Focusing on a specific sub-segment of your local market allows you to master your product type. This will help you optimize your cash flow, and also ensure your tenants have a satisfactory experience. If you don’t have satisfied tenants at your first collection of properties, it’s impossible to expand your real estate investment scope further.
•Establish your system and workflow: When you’re operating in a target area you’re comfortable in, you’ll have the opportunity to establish your operating strategies and systems. This provides you with the environment you need to hone your property management skills, teaching you how to reduce operating expenses while improving revenue.
•Minimize risk and reduce surprises: Every market has risks. While you’ll want to diversify your assets eventually, getting your start in a single, highly-defined target area helps you learn how to anticipate risk in a particular sub-market. You’ll quickly learn about potential surprises affecting real estate when you’re focused on a small target area.
•Duplicate your success: Once you’ve established a successful investment model with one property in your target area, it’s easy to acquire another property and duplicate that model. You know how the sub-market variables impact the real estate business in your specific target area. Take that knowledge and leverage it to optimize your next investment even further.
How to establish a target area
Choosing a target area to make your first investments in is often challenging. To select a target area, you’ll have to consider more than just location. Think about things like the type of asset you’d like to acquire and the income bracket you’re targeting your rental residences to, as well as other factors impacting your ability to achieve your investment objectives.
To establish your target area, set parameters around both macro- and micro-variable factors. This will help you hone in on both a geographical sub-market and the asset class you’re focused on.
Finding a geographical target area
The largest macro-variable factor you’ll need to consider is the geographical location of your target area. This will largely determine the amount of capital necessary to execute your investment, and the rate at which your asset will appreciate, as well as the rents you’re able to charge.
Firstly, select your major market. This should be a city or a segment of a major metropolitan area you’re hoping to invest in. Rather than saying “Toronto,” establish a more specific area as your major market. For instance, you might conclude York is your major market, even though it’s a small subsection of the greater city of Toronto.
Once you’ve established your major market, it’s time to hone in on a particular neighborhood or postal code. If you decide York is your major market, consider establishing Mount Dennis as your geographical target area. It’s all about narrowing focus.
When selecting a geographical area, consider the tax-assessed values of assets in your target market. While this value may not exactly reflect the actual market value of the home, it will give you a good idea of the appreciation rate and the status of the micro-market you’re considering.
You’ll also need to take a look at crime statistics for your target area. High rates of crime will make it more challenging for you reap your expected return, as will poor local school performance. Try to purchase properties within a reasonable driving distance of your own home, as well, for the sake of property management convenience.
Other macro-variables you’ll have to consider include the type of asset you’re planning on purchasing. If you’re thinking about purchasing a single-family home, you’ll likely have lower operational costs and a lower barrier to entry. Purchasing apartment buildings, however, could provide you with better overall returns.
Micro-variables are property specific parameters you’ll need to set. For instance, you may be more comfortable investing in a building with a brick façade versus vinyl siding. Establishing rules surrounding micro-variables can help you set yourself up to purchase an asset you’re comfortable owning and managing.
Common micro-variables you need to think about include the type of foundation, the age and style of the building’s heating system and the property’s maintenance or repair needs. Micro-variables largely boil down to personal preferences, and the amount of risk your investment strategy allows you to take on.
Establishing a target area allows you, as an investor, to more accurately identify properties that meet your needs, and create a property management strategy optimized to improve cash flow and generate more passive income. Do your market research and examine the micro- and macro-drivers pushing those markets. In time, you’ll become a master in your market, ready for bigger and more lucrative investment challenges in other markets!