How many markets should you be in as a rookie?

Luke13735

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Jan 18, 2018
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#1
I like to break down markets into three categories: Cyclical, Linear and Hybrid. As a rookie I am staying away from cyclical markets. I want to geographically specials in either Calgary or Lethbridge. (Hybrid and Linear) Buy and hold is our strategy. If a property fits our system and goals should we be in both markets or focus on one?
 

Martin1968

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#2
Luke

What ‘system’ are you talking about?

And.......all nice and dandy to break down markets in categories but what is your aim?

I can tell you, as someone that knows both markets you are interested in from an investment type of view, there is only one ‘market’ that interest me personally, and that’s the market where there is an opportunity. An opportunity to make money! I’m sure you have done your homework and you will find many on this forum that think it’s awesome you have broken it down,maybe calling themselves sophisticated or well educated investors, but all I can say is to invest where the market offers opportunities. Once you see those opportunities in real estate investing, or in any business opportunity for that matter, it absolutely doesn’t matter how a market is broken down and how it’s named. Cheers and good luck on your investing adventure.
 

ThomasBeyer

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#3
I like to break down markets into three categories: Cyclical, Linear and Hybrid. As a rookie I am staying away from cyclical markets. I want to geographically specials in either Calgary or Lethbridge. (Hybrid and Linear) Buy and hold is our strategy. If a property fits our system and goals should we be in both markets or focus on one?
Which market is linear as opposed to cyclical?


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 
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Matt Crowley

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#4
@Luke13735 to add a bit to the "cyclical" thought, I'd suggest this reading material:

https://www.naiop.org/en/Magazine/2...spx?_id=8B220B99966444FB9CEFCD7A07C9B37F&_z=z

chandan.JPG

Secondary markets the ones you are calling "cyclical" can be extra punishing to investors - and timing them is actually more important than in primary markets.

For the record, Calgary is a "secondary" market. Lethbridge is a very small tertiary market so be careful. Small towns are not very good at diversification because they have extra operational stressers (good management / PM / trades / small market to draw from / limited growth prospects)

A good way to think of markets is about diversification in economic drivers. Both Calgary and Lethbridge will be driven by the same oil / energy economics. As you get into cities where there are very different mixes of businesses and industries that is where you find actual market diversification. I think the best proxy for this is the Herfindahl-Hirschman index (HHI) - basically a number that determines industry concentration - less concentration is a stronger market.

It's great to see you thinking in terms of tranches of risk though. I would suggest taking a risk-adjusted return approach. Real estate is very asset specific but is broken into 4 risk-return categories:

Core: lowest risk / return profile, A-tenants. 5-7% return
Core plus: modest improvements required, strong B+ to A tenant profile. 6 – 9% return
Value add: deep improvements, some in place tenants, willing to take on substantial vacancy 10% - 15% return
Opportunistic: development projects, complete refurbishment, higher risk profile. 13% - 20% return


Good overview of above (page 104): https://s3-us-west-2.amazonaws.com/static.crowdstreet.com/e-book.pdf

With direct real estate investment here are my general allocation suggestions:

- keep direct investment in real estate below 30% of total net assets (most direct investments are close to home, which are very closely tied to personal job so poor diversification ie. everything goes down at same time)
- avoid >70% leverage
- try to invest in 3 different markets at minimum
- if low experience, stay in core and core plus investment categories only
 
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Bryon Howard

Realtor - can't sleep until your sold!
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Apr 30, 2015
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#5
I live in Calgary ... and have invested in Red Deer, Edmonton and Grand Prairie since 2003.
In my experience, invest where you live. (I still own one 'dog' property in Lacombe.) Both Calgary and Leftbridge are good markets. I'd welcome the opportunity to assist you in Calgary. :)
 
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CorySperle

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Sep 1, 2010
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#6
In my experience almost all markets I have seen have been cyclical, and nearly always follow the seasons spring, summer, fall, and winter. There are locations however, that are in eternal real estate winter, which would be the only linear example I would use. Timing markets to buy in is tricky, as many get burned buying in late summer and fall and then try to sell in winter and spring. Buy in the location that makes sense to you, and if your in it long term you will do okay. I would consider Alberta right now to be in spring, and many parts of BC like the okanagan to be in late late summer.

How many markets should you be in as a rookie? Only one, and very close to home.
 
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Martin1968

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Jan 22, 2017
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#7
@Luke13735 to add a bit to the "cyclical" thought, I'd suggest this reading material:

https://www.naiop.org/en/Magazine/2...spx?_id=8B220B99966444FB9CEFCD7A07C9B37F&_z=z

View attachment 1293

Secondary markets the ones you are calling "cyclical" can be extra punishing to investors - and timing them is actually more important than in primary markets.

For the record, Calgary is a "secondary" market. Lethbridge is a very small tertiary market so be careful. Small towns are not very good at diversification because they have extra operational stressers (good management / PM / trades / small market to draw from / limited growth prospects)

A good way to think of markets is about diversification in economic drivers. Both Calgary and Lethbridge will be driven by the same oil / energy economics. As you get into cities where there are very different mixes of businesses and industries that is where you find actual market diversification. I think the best proxy for this is the Herfindahl-Hirschman index (HHI) - basically a number that determines industry concentration - less concentration is a stronger market.

It's great to see you thinking in terms of tranches of risk though. I would suggest taking a risk-adjusted return approach. Real estate is very asset specific but is broken into 4 risk-return categories:

Core: lowest risk / return profile, A-tenants. 5-7% return
Core plus: modest improvements required, strong B+ to A tenant profile. 6 – 9% return
Value add: deep improvements, some in place tenants, willing to take on substantial vacancy 10% - 15% return
Opportunistic: development projects, complete refurbishment, higher risk profile. 13% - 20% return


Good overview of above (page 104): https://s3-us-west-2.amazonaws.com/static.crowdstreet.com/e-book.pdf

With direct real estate investment here are my general allocation suggestions:

- keep direct investment in real estate below 30% of total net assets (most direct investments are close to home, which are very closely tied to personal job so poor diversification ie. everything goes down at same time)
- avoid >70% leverage
- try to invest in 3 different markets at minimum
- if low experience, stay in core and core plus investment categories only
I can go along with most of this. Looking at expected average returns mentioned, this is how it is for any investment, for example investing in a business, what location, sq footage, what market, paying a higher location price in order to have great exposure and to be close or in the market you want to be in, etc.
Same for investments in financial markets, the greater the risk you are willing to take the better the potential return on investment can be.

About how many markets you want to be in? Well what would you define as a market. Is Alberta a market? Or are Calgary and Lethbridge markets on their own? To me that’s an answer that only you as an investor can answer. Depends on what you feel your market is. For me personally my market is defined as central and southern Alberta as I want props to be within driveable distance, for others it doesn’t matter and they count 3 prairie provinces as their market. Whatever works I would say.

The one remark I would want to give tho is when talking about markets being driven by oil/energy sector economics, that’s anywhere and everywhere in Alberta, but if there is one exception to this it would be Lethbridge, with Medicine Hat as a close second. You can do some research for yourself what drives these cities for the biggest part and it isn’t necessarily the energy sector.

Smaller markets you say? Depends on what you define as a small market in real estate investing. Lethbridge, Medicine Hat, Red Deer are similar size cities with a similar size populations but the economics of these places are different. After Calgary and Edmonton they are amongst the biggest cities in Ab, But most importantly (except for Red Deer at current) there is real good money to be made in RE. Lethbridge by far the biggest winner with property prices (MF) being low (having been) as opposed to rents. Medicine Hat slightly different, higher prices but lower rents, and Red Deer at bottom of that list.

Why would you want to look at these markets if it fits your ‘system’ Cause there is money to be made.
And no matter what type of investor you are, what type of market you want to be in, there would only be one thing that counts in my opinion, where and how can I (we) make money. Name of the game in any type of investing.
If not for you, stuff you mattress with your life savings and just sleep on it.
 

Matt Crowley

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#8
@Martin1968

Small markets have very low liquidity and the smaller the markets you are in the lower your liquidity (Source). Small markets you should get a higher yield but its often not worth it because it is a lot more difficult to exit the position.

My suggestion on market definition is Hersfindhl index, and it works well as far as identifying industry drivers.

Generally I look to place ~$5-$15m at a time so it doesn't work to invest in small markets. For that reason, Canada has 8-10 eligible markets, but I'm not married to Canada in any way and generally there are better opportunities in U.S. and select ones Mexico. I'd personally define Edmonton and Calgary as a small cities. The other cities in Alberta are not really markets in my opinion, at least in terms of what I look for.
 

Martin1968

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#9
Matt, the disconnect between you, me and the large majority of investors on this forum is that we invest our OWN hard earned money and put it to work in markets that we know can earn us a return. And a damn good one if you ask me.

You, on the other hand, are investing others peoples money, slaving away in a fancy suit and (i would hope) in an air conditioned office with likely other fancy suits.

From the safety of your office and behind your computer you can be all you want. Looking at indexes, attach links to emails and look at props 5-15 Mil. Of which you personally own how many?? Makes me think of Brad Paisleys song, So Much Cooler Online.

Anyhow not trying to be disrespectful.......just saying.
 
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Matt Crowley

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#10
@Martin1968 Well, I invest my own money in these ventures as well. Eventually, I think you will find that you will need others capital to grow your business. I believe if you stay with REIN you will be introduced to the idea of "joint ventures" which is investing other people's money.

For the record, I've done the legal suite route and SFH investing as well and know it well. There are just better ways to invest that make more money with less risk.

Fundamentally, I don't think SFH direct investment beats benchmark returns and is usually just an expensive, unpaid hobby. I would encourage you to review deals like those on CrowdStreet and see if you are actually beating these investors. It's easy to beat a benchmark of 0%, but are you actually beating an indexed return adjusted for risk - that is what every professional investor should seek to achieve. Alpha.
 
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Bryon Howard

Realtor - can't sleep until your sold!
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Apr 30, 2015
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#12
Matt, the disconnect between you, me and the large majority of investors on this forum is that we invest our OWN hard earned money and put it to work in markets that we know can earn us a return. And a damn good one if you ask me.

You, on the other hand, are investing others peoples money, slaving away in a fancy suit and (i would hope) in an air conditioned office with likely other fancy suits.

From the safety of your office and behind your computer you can be all you want. Looking at indexes, attach links to emails and look at props 5-15 Mil. Of which you personally own how many?? Makes me think of Brad Paisleys song, So Much Cooler Online.

Anyhow not trying to be disrespectful.......just saying.
HaHa - you funny Martin.
 

CorySperle

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#14
The main reason why do it yourself beats investing in a 'suit' as you say, is you aren't charged the heavy and ridiculous fees charged regardless of performance, not to mention all of the shady dealings, bankruptcies, and ventures that go sour trusting your hard earned money to a 'professional'. Stating that you can get a higher return consistently trusting your hard earned cash to someone else vs. buying a suited home is simply false. For every investment out there that will generate higher returns, there are three times as many that will lose everything and you don't hear about those.
 

Martin1968

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Jan 22, 2017
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#15
The main reason why do it yourself beats investing in a 'suit' as you say, is you aren't charged the heavy and ridiculous fees charged regardless of performance, not to mention all of the shady dealings, bankruptcies, and ventures that go sour trusting your hard earned money to a 'professional'. Stating that you can get a higher return consistently trusting your hard earned cash to someone else vs. buying a suited home is simply false. For every investment out there that will generate higher returns, there are three times as many that will lose everything and you don't hear about those.
Amen!
 

Luke13735

New Forum Member
REIN Member
Jan 18, 2018
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1
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#16
Luke

What ‘system’ are you talking about?

And.......all nice and dandy to break down markets in categories but what is your aim?

I can tell you, as someone that knows both markets you are interested in from an investment type of view, there is only one ‘market’ that interest me personally, and that’s the market where there is an opportunity. An opportunity to make money! I’m sure you have done your homework and you will find many on this forum that think it’s awesome you have broken it down,maybe calling themselves sophisticated or well educated investors, but all I can say is to invest where the market offers opportunities. Once you see those opportunities in real estate investing, or in any business opportunity for that matter, it absolutely doesn’t matter how a market is broken down and how it’s named. Cheers and good luck on your investing adventure.

Hey Martin,

Thank you for your post!

Our system would be as follows: Investing in single family properties that are zoned for basement suites that have enough positive cashflow to support second mortgages. (Detached garages/Carriage homes) Thus structuring our business so that it can support the weight of growth we want to see.

Our aim is first to get out of the "rat race" by investing in buy and hold.

Thanks again for your time and insight.
 

Luke13735

New Forum Member
REIN Member
Jan 18, 2018
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1
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#17
Which market is linear as opposed to cyclical?


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
Mr. Beyer,

In my first question I was labeling cities as "markets" I didn't give an example of a cyclical market/city. Lethbridge is what I would label as a linear market because it is not heavily reliant on the oil and gas industry. Fort Mcmurray would be in my opinion a cyclical market.

I really enjoyed your segments that were recorded on the ACRE I received.

Respect
 
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Luke13735

New Forum Member
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Jan 18, 2018
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#18
@Luke13735 to add a bit to the "cyclical" thought, I'd suggest this reading material:

https://www.naiop.org/en/Magazine/2...spx?_id=8B220B99966444FB9CEFCD7A07C9B37F&_z=z

View attachment 1293

Secondary markets the ones you are calling "cyclical" can be extra punishing to investors - and timing them is actually more important than in primary markets.

For the record, Calgary is a "secondary" market. Lethbridge is a very small tertiary market so be careful. Small towns are not very good at diversification because they have extra operational stressers (good management / PM / trades / small market to draw from / limited growth prospects)

A good way to think of markets is about diversification in economic drivers. Both Calgary and Lethbridge will be driven by the same oil / energy economics. As you get into cities where there are very different mixes of businesses and industries that is where you find actual market diversification. I think the best proxy for this is the Herfindahl-Hirschman index (HHI) - basically a number that determines industry concentration - less concentration is a stronger market.

It's great to see you thinking in terms of tranches of risk though. I would suggest taking a risk-adjusted return approach. Real estate is very asset specific but is broken into 4 risk-return categories:

Core: lowest risk / return profile, A-tenants. 5-7% return
Core plus: modest improvements required, strong B+ to A tenant profile. 6 – 9% return
Value add: deep improvements, some in place tenants, willing to take on substantial vacancy 10% - 15% return
Opportunistic: development projects, complete refurbishment, higher risk profile. 13% - 20% return


Good overview of above (page 104): https://s3-us-west-2.amazonaws.com/static.crowdstreet.com/e-book.pdf

With direct real estate investment here are my general allocation suggestions:

- keep direct investment in real estate below 30% of total net assets (most direct investments are close to home, which are very closely tied to personal job so poor diversification ie. everything goes down at same time)
- avoid >70% leverage
- try to invest in 3 different markets at minimum
- if low experience, stay in core and core plus investment categories only

Hey Matt,

Thanks for the info! I'll check it out.
 

Luke13735

New Forum Member
REIN Member
Jan 18, 2018
5
1
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#19
In my experience almost all markets I have seen have been cyclical, and nearly always follow the seasons spring, summer, fall, and winter. There are locations however, that are in eternal real estate winter, which would be the only linear example I would use. Timing markets to buy in is tricky, as many get burned buying in late summer and fall and then try to sell in winter and spring. Buy in the location that makes sense to you, and if your in it long term you will do okay. I would consider Alberta right now to be in spring, and many parts of BC like the okanagan to be in late late summer.

How many markets should you be in as a rookie? Only one, and very close to home.
Hey Cory,

Thanks for your input. I agree that there are always cyclical aspects in every market. I live 1hr from Leth and 3 hours from Cgy. I have great connections in both cities. We are now breaking down and weighing neighborhoods against each other in the two cities.

Cheers