🧑‍🎄🎄 On the 5th Day of Real Estate Christmas: Picking the Right Market

Merry Christmas again from My First Million in Multifamily!

We are back with day five of the 12 Days of Real Estate Investing Christmas. So far we have talked about underwriting at its simplest, cap rates and the two different types of cap rates, what to look for first in a market, and the different structures that exist in commercial real estate investing.

Today is day five. A quick, easy to digest lesson on commercial real estate investing. How do you pick a market?

I keep this one super simple. KISS. Keep it simple.

There are just a couple of things I really pay attention to when I am deciding whether I want to invest in a market.

The first thing is insurance risk. Do I understand the insurance risks in that market?

People often ask why insurance comes before taxes. Taxes are predictable. If taxes are high in a market, you know they are high going in and you can plan for that. Insurance is different. Insurance can change fast.

A real example. We owned a 200 plus unit asset in Tulsa, Oklahoma. After a series of bad thunderstorms, several insurance carriers pulled out of that market. Our insurance cost doubled in one year, going from $150,000 to $300,000.

So the first question I ask when looking at a new market is this. Do I understand the insurance risks?

I live in the Lowcountry of South Carolina. I understand hurricanes and severe thunderstorms. We own property in Louisiana. Hurricane risk there is not a matter of if, it is a matter of when.

There are other risks I do not understand as well, like mudslides or earthquakes. Fire risk exists everywhere, but the key question is whether you understand the risks from an insurance carrier’s perspective.

If you are looking at a market you are not familiar with, talk to a solid commercial insurance broker. Ask them directly what the real insurance risks are in that market.

The second thing I look at is whether the market is landlord friendly or tenant friendly.

I keep this simple too. I look at how long it takes to evict a tenant for nonpayment under normal conditions.

There are always exceptions. Courts can get backed up. We saw this during eviction moratoriums a couple years ago. Even in landlord friendly markets, it might take a few months just to get on the court docket.

But under normal conditions, if it takes more than 60 days to evict a nonpaying tenant, that is a market I really have to think twice about.

If a tenant is not paying, they cannot stay. Rent pays the insurance, the taxes, the HVAC repairs, the water bill, and everything else that keeps the property running.

If removing a bad actor takes too long, the juice is not worth the squeeze.

So for me, it really comes down to two things.

Do I understand the insurance risks in the market?

And is the market landlord friendly or tenant friendly?

That’s it. Happy fifth day of Real Estate Christmas, and we will see you next time.