Professional real estate sponsors look at hundreds of deals per year. So they require a quick and easy way to filter through the noise and capture the hidden gems. One of the best ways to validate an opportunity is with a simple checklist that looks at key indicators.
The best checklists are highly personalized to your unique investment goals and should be used when entering new markets. They serve as a critical first-step before entering a full-blown analysis by telling you if the investment opportunity is right for you.
That’s why we sat down with Brian Watson, CEO of Northstar Commercial Partners — where he has overseen the acquisition of over $650.8 million of property value — to discuss how to use checklists to validate markets.
Contrarians Find the Best Deals
Before we dive into the checklist indicators, Brian shares his most important rule for every investor to keep in mind. “Keep your eyes open,” he says. “If you make over generalizations about a market, you’re not going to see any deals because your whole paradigm and mindset says there’s no deals.”
It’s important to “keep your lines off the back of the boat,” Brian says. Independent of price — whether high-end assets or lower-end value add projects — there are good deals across every spectrum of the market. “We’re not buying an entire market,” Brian notes. “We are buying individual assets within the overall market.”
Real estate investors must always be searching in order to grab deals when everyone else is looking elsewhere. The most important aspect of real estate investing, as Brain reminds us, is making sure you execute on your investment plan.
A Sponsor’s Checklist
A checklist is made up of market indicators that tell you when to expand into a new market or make the hold versus sell decision.
Brian says that on the acquisition side, his company looks for markets that have strong characteristics. “Ideally, we want a minimum population of half a million people and a market that has a positive outlook for the future,” he says.
Brian’s checklist also includes a line item to check what the role of the government is in that market, how much property taxes will be, what the employment trends are, and whether there’s any future development plans in the area.
When it comes to the individual asset, Brian looks for buildings with good bones that can be repositioned, whether that be an industrial or office building.
More important than the asset type, the key question Brian asks when looking at each deal that crosses his desk is, “What is the highest and best use of that particular asset?” Approaching each deal in this way opens up your creativity to market forces others may miss.
For example, Brian has turned a vacant buildings into charter schools and industrial buildings into business incubators. That’s why you start with market indicators first so you know what will work in a particular area. It’s all about the highest and best use for a particular market.
Brian admits he takes a bit of a contrarian approach to buying assets. “I believe that it’s less risky to buy a fully vacant asset for pennies on the dollar, then it is to buy a fully leased asset,” he says. “It allows me to cut a better deal to secure a tenant for the building because I can afford to be more aggressive.”
The math doesn’t have to be complicated. “We practice a lot of cowboy math here being that we live in the West and I’m from a small agricultural town in the western slope,” Brian says. But while his approach seems simple, it is highly effective at spotting great deals.
“What cowboy math really means is being able to explain a deal on a napkin and clearly explain where the market is — here’s what we can buy it for, here’s our improvements, and here’s our exit. If the only way you can get to the value is by running some long proforma, it’s probably not a deal for us.” Ask yourself, “What are the drivers here?” “What’s the opportunity?”
Start Building Your Own Market Checklist
When asked how investors can start developing their own personalized checklist, Brian suggests approaching the economic development groups in your area where you’ll find historical trends and information. In fact, Brian is a big fan of starting at the local level.
“I would encourage people to first focus in their local market because you can easily turn over stones and look at deals before finding other areas that you think have promise,” he says.
He speaks from experience. One of Brian’s highest returns was in his local town of Nashville, Tennessee. “We bought a vacant building from a pharmaceutical company, turned it over, and sold it for a 700% return on our invested dollars.”
“Real estate is local by nature but when you start developing relationships in other markets, then you can start to do deals in those markets as well,” Brain says. You can then transfer ideas that are working well in your local market and apply them to a different market.
“In Denver for instance, we have a unique business incubator and some cultural centers and other things like that. When we applied those ideas into other markets where these things are not so concentrated, we have found it to be very successful.”
Start building your investment checklist one step at a time. You’ll soon start to see patterns and trends within each geography, identify where the growth is, and where there’s a positive outlook for the future. As soon you find a potential opportunity, find out how you can execute within that market by buying good real estate in great locations. For a place to start, check out the Beginner’s Guide to Real Estate Investing
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