Owner of The Mandrell Company. Real estate investor, broker, coach, lecturer and author.
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I’m a big fan of finding your particular niche when it comes to real estate investing. When I started my rental property business I made a lot of mistakes by going after shiny objects instead of fully committing myself to anything in particular. Over the years I’ve narrowed my focus and now try to teach new investors to commit early on. At this point, my business is laser-focused. I invest only in rentals within three specific neighborhoods in one city, narrowed down even further by property and building type. I’m super niche. You don’t have to do exactly what I’ve done to be successful, but it is important that you thoroughly understand your product as an investor.
When you narrow your focus by developing your niche, you’re able to make more money for many reasons. When you invest within your niche, you’re able to knock out the competition and secure a great deal faster because you need less due diligence time, you can buy or sell ahead of changes and you understand the rental trends and tenant base allowing you to maximize rental income on your units. Think of real estate as the medical field. Being a general surgeon is nice, but the real money is in neurosurgery or cardiothoracic surgery. When you specialize in one niche, you take your career to the next level.
Geographical Niche
Not all rental property is created equal. Single-family rentals in Alabama do not move and operate the same as multifamily rentals in Detroit. As an investor, you should focus on one geographical area, such as one or two states, and really learn the ins and outs. What are the economic factors that affect rent in that area? Are there large employers that are coming or going? Get a sense of the local politics. Is it easy to build in that area or are there a lot of restrictions?
Keep in mind that what’s trending nationally is not necessarily the same trend taking place in your niche market, so try not to get caught up in the national news when making decisions about your rental properties. You can have markets in Kansas experiencing high economic times while markets in Florida are booming with low inventory. Even two neighborhoods within the same part of a state could be operating under different assumptions, so it’s important to do your research.
Property Type
Identifying your property type is equally as important as determining the right geographical area. You need to know whether you want to invest in residential or commercial properties and, if residential, single-family or multifamily properties.
Residential and commercial markets within the same city can have different dynamics. For instance, if a massive casino is built in a particular neighborhood, it may drive more commercial businesses into the neighborhood while simultaneously driving down residential home prices as people try to move away from the traffic a casino would bring. Most investors stick to one particular niche, whether commercial or residential, and understand how changes to a particular neighborhood can affect their property values, rent values and longevity.
When choosing your property type, keep your geographical niche at the front of your mind. Let’s say residential, single-family real estate is your investment of choice. In the northeast, it’s difficult to find many neighborhoods where a single-family home will provide adequate cash flow as rent prices are too high compared to the value. While this may be the case in the northeast, it certainly is not the case in many other areas around the country where single-family homes tend to be the go-to for real estate investment.
Price Point
What price point do you want to stick to? Price points can vary wildly within a specific neighborhood or city. It’s your job as an investor to understand values inside and out so you can recognize good deals when they’re presented to you. Determining your price point also helps you determine rehab and repair budgets, along with the value of those improvements.
Tenant Base
Who is your ideal tenant? Whether you’re doing the management yourself or just selecting tenants, you should know who the ideal tenant is for your market, property type and price point. What are you looking for in an applicant and will you know when you’ve found them? Are they market-based tenants or subsidized tenants? Are you taking the first month’s rent or first, last and a security deposit at move-in? Is your typical lease a one-year lease, or are you operating in a student-based neighborhood where they’re likely to stay for only nine months at a time? Understanding your current, potential and ideal tenants is critical to making financial decisions.
Once you decide on your niche and invest in properties within it, you’ll find you’re able to get better pricing for repeat business with local vendors, suppliers and contractors. For instance, my snow removal vendor would typically charge me $100 per property, but because I’m giving him business at three locations, the cost is $225 total or $75 per property. Real estate agents in wholesale will know you, know your business and understand your niche, and will therefore be willing to bring you deals before they hit the open market. Lenders will feel more comfortable with your business when they know you understand the local markets. Remember, as Bruce Lee once said, “The successful warrior is the average man, with laser-like focus.”
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