What to Look For When Entering New Markets

When we conceptually look at various markets where we’re going to invest capital, we will tend to look at three principles of a model real estate investment market. We will look with this lens in mind and try to ascertain whether or not the market may fit within this model, this paradigm of what makes a great market. We’ll do a follow on video talking about specific markets. But I want to give you an idea about the mindset as you go into evaluating a specific market. And the same is true for elements like investing in technology business, investing in single family residentials and across all asset types. Whenever you invest, you always invest within a geography in mind predicated on the capacity of the competency and availability of resources and specifically people within those markets.

 

Examples from Rabbi Daniel Lampin

There’s a great book that I read back in college by the name of Rabbi Daniel Lampin. And the good rabbi wrote this great book called Thou Shalt Prosper. It was essentially ten principles that never change that Jewish families teach their children. So these are ten principles which will propagate it from generation to generation to generation. And these are keys to their wisdom that is perpetuated in the Jewish community forever. I haven’t really met any poor Jewish people lately and I think there’s a reason for that, thatt here’s a culture that success is intrinsic and it’s built into that culture within the Jewish families.

And Rabbi Lamp is great at ascertaining what those principles are as an insider. This is ancient Jewish wisdom on how families would teach their children. And one of the principles in there, which I’ve always remembered was that Jewish families, if they raise their children on a farm in a rural area, in a city, one of the things they tell them is as soon as you get out of here, move to the largest city possible, move to the largest population possible, and there you will find the greatest potential wealth.

That’s interesting. That’s interesting because a lot of us, those of us that grew up in the south and farming communities, the farmers always used to kids, they hope their kids stay on the farm to help work the farm. But the Jewish folks, they tell their kids the opposite to go away, to find the biggest city you can move to and move there, get there. And that’s interesting.

 

#1: Population Density and Growth

Principle number one is the idea that population density and growth predicate success investments. Let’s use the example of a small hotel versus a large hotel, a large convention hotel. Think about the amenities between both. If I go sit in a small hotel that has 15 rooms in it, I’m not going to get room service. I’m not going to have a bar to go to. I’m not going to get great breakfast, dining in the morning. I’m not going to get that. If I go to a large Ritz Carlton resort, I’m going to get all those things. 24/7 dining, that’s fantastic. I’m going to get poolside service. I’m going to get great restaurants for breakfast, lunch, and dinner, and an amazing bar or two to go to. I’m going to get great service. The staff is going to be properly trained to fit my desires.

And so here we have embedded within the first principle, that the larger and the denser the population, the greater the amenities and the services. It’s just a force of economics that the larger quantity, the larger customer base, and the denser it is, the more amenities and services and energy you can feed into it. And energy is feeding that.

Additionally, when you start looking at the current culture, you’ll see this delivery car culture perpetuating itself and propagating itself throughout the major markets. You look at things like Door Dash and Uber Eats that people want to have ultimate convenience and have delivery of services and products to their homes, to their workplaces, as fast as possible. And so if a delivery service has the option of delivering to 100,000 people within a five minute drive or 1000 people within a five minute drive? The smart organization will pick the 100,000 people. And if you look at the denser parts of areas where these urban areas are the dense as possible, you’ll see not only smaller partial sizes for pro rata population, but also you’ll see vertical.

And once you start talking about vertical populations, it’s hard to compete with a lateral or horizontal population base where they’re in larger master planned communities. It’s hard to do that. So your vertical cities, your vertical neighborhoods will accrue the greatest and best amenities first and foremost. And finally, the growth of these populations will lend themselves to be insurmountable.

 

Fastest Growing Markets

The fastest growing markets have a built in risk aversion. If you have a population that’s growing, that means demand is growing for the real estate and for the ancillary services that the real estate supports. Your restaurants are in higher demand. Your office space is in higher demand. Your warehouse and your logistics are in higher demand as the population grows. And that is something that really has to betaken into account in your real estate investments. We’re looking for growing markets.

 

#2: Energy

Secondly, energy, like, we learned it too, when you travel, you look at these restaurants, and the way you pick a restaurant is either through Google reviews or you visually look what restaurants are the most crowded, and that’s where we’re going to eat. Everyone wants to eat at the crowded restaurants. There’s a reason why the empty restaurants are not any good. Everyone knows that. It’s a self fulfilling prophecy that there’s no line there’s no crowd, the food is not going to be good, the restaurant is not able to support their staff, the food quality declines in order to maintain margins, and it’s a vicious cycle.

Cities are the same way. Business movement as well is one impact. When you see Tesla moving into Austin, when you see great movements into these newer hipper cities, you have this energy. And energy is what cities are really looking for. Energy is why a vacant office building is so hard to fill. To be that first tenant that comes in there with zero energy, that’s difficult. So generated energy is one of the primary responsibilities of an investor, an entrepreneur, and a real estate investor.

 

#3: Politics

And third, finally, this is the most important, is politics. If you are considering an investment in a market that has radical politics, think again. You look at the absolute devastation in places like Portland, San Francisco, and downtown Austin where the homelessness has run rampant. Crime is rampant, the taxes are just outrageous, the schools are horrendous, and morals are not what they need to be. You see morals propagate throughout society in a way that nothing else does. And it’s hard to reverse that. You saw Giuliani do that in New York in the 1980s. He fixed the crime and he fixed the communities through intense law enforcement. It’s possible, but it’s very difficult to find leadership that would come in and be able to tackle a problem in a large city like the three cities that I named.

Schools. You got to have quality schools. You’ve got to have very expeditious permitting. You can’t wait months and months and years and years for permit for new development that will kill the economy and kill growth.

And finally, you want to look at the homelessness and how people are taking care of the homeless within their cities. If they’re on the homeless to live wherever they want to live, that’s fine and all, but at certain point, property is property. And a certain people violate property rights of other owners that own property, they diminish the property vouchers, they kill the value there. And that tells you where the politicians are politically motivated. Instead of being focused on the people and upholding the value of protecting the value of the assets of the community and protecting the tax base of the community, that is a red flag that you want to get out of there.

 

The Trifecta

So we find these three things at play population density, growth, energy, and politics. If these things are aligned, there’s a good chance that that market will be a viable market for growth, great investment, and a great place to raise a family, and to be focused on building a credible and viable real estate portfolio.