RESEARCH THE MARKET

“Yes, hello, listen. I’m on your company website, and I see you have eight properties for sale in Memphis. I want to buy all of them.”

The man on the other end of the line was someone I’d never spoken to before. He introduced himself as Jack, a businessman from Chicago. He’d visited Memphis once before and taken a shine to it, so he wanted to invest here. But after a few minutes of conversation, it became clear to me that that was the extent of his research on the local market—a fact that didn’t slow him down. “I’m ready to invest today,” he said. “Shoot me over some contracts.”

I didn’t feel right selling Jack all eight properties at once, under the circumstances. “Look,” I told him, “Here’s what we can do. I’ll sell you one or two of these properties to start so you can get a feel for our company and this market. If everything works out, then great. You can buy more houses from there.”

A beat of silence went by on the other end of the line. I could hear him take in a deep breath like he was trying to compose himself, and he started into why he didn’t need to go slow. He had done his research. He was a very successful businessperson. He knew how to make deals and knew that real estate was exactly what he wanted to invest in.

He had heard all about Memphis as a great investment market and was very proud of the fact that he knew he could find “great, cheap deals” in the market. What he really needed was someone who could manage everything for him.

At the time, our company was pretty big. We were buying, renovating, selling, and managing close to 200 properties a year. The turnkey real estate industry was still relatively new, but our company was one of the first to concentrate on building our brand. We had built several avenues through advertising, use of a blog, publishing educational articles, and doing podcasts that were all meant to build our brand. It was apparent to me that Jack had heard about our company and decided he wanted to get going right away.

The problem at the time was that the more I dug, the clearer it became that Jack was in too much of a hurry. He hadn’t done his research. Regardless of what he knew about me, he had no clear vision for why he wanted to invest in real estate and knew little to nothing about the market. He was shooting from the hip.

We spent half an hour on the phone with me trying to direct the conversation toward his getting educated on why Memphis might be the right market for him and him trying to steer the conversation back to buying eight properties on the spot. When it became apparent that I wasn’t going to sell him the eight properties I had available, he said something that I have never forgotten.

“Mr. Clothier,” Jack said finally, “you are the worst salesman I have ever spoken to in my life.” When I stuck to my guns, he added, “You will regret your decision,” and hung up. A week later, he called back to tell me again how bad a salesperson I was. He couldn’t wait to tell me he’d bought 12 properties in Memphis from another company. I laugh thinking back now how proud he was that he bought 12 properties. Not eight like what I had, but he had actually bought even more.

I knew the company that he had bought from and the areas that it managed. Needless to say, we weren’t doing business in the same parts of town. I just shook my head and wished him the best of luck.

Later, I learned that Jack had paid market premium for 12 poor-quality houses in an area of town where rents were falling due to the neighborhoods being older, dilapidated, and economically challenged. To say these houses were located in struggling areas would be an understatement.

Now, I’m not saying that an investor shouldn’t invest in a struggling neighborhood or take on the challenge of bringing some renewal and change to neighborhoods that are neglected. I am saying that it is almost impossible for that to happen with a turnkey company. Those properties and those neighborhoods that are in struggling areas of cities need local investors. They need a concerted effort from a lot of groups including local investors. Exactly how that looks is another topic for another time. I will discuss a little later the details of why low-cost properties in struggling neighborhoods simply do not make economic sense for a turnkey investor. In a nutshell, there is too much risk.

Jack is a perfect example, as you will see, of why that risk is made much worse by investors who are in too much of a hurry to investigate where they are investing. His unstable tenants didn’t stay in the properties long. The properties were never properly renovated, which left residents frustrated and moving out quickly, which led to vacancy, lost rents, and vandalism and left him with thousands of dollars in repair bills every time they vacated.

A year later, Jack called me again. This time, he wanted to know if we would buy those 12 substandard properties from him. He was ready to make a deal and offload them quick and at a substantial loss.

“Jack,” I said “I’m sorry, but you were in too much of a hurry to know what you were buying. You didn’t research the market. You didn’t care about the neighborhoods you were buying. You didn’t even want to take the time to learn how a company manages properties and how it tries to hold down vacancies and maintenance. You were in too much of a hurry to take time to understand what you were buying. You just wanted in. I can’t take those houses off your hands. They simply are not in areas that I would buy for my portfolio, much less want to manage, so I won’t buy them for my clients, either.” Again, I wished him the best of luck.

Jack ended up selling most of those properties at a tremendous loss—all because he couldn’t be bothered to research the market before he invested.

THE VALUE OF RESEARCH

The beautiful thing about the turnkey revolution is that you can invest in turnkey real estate from anywhere. If you follow the steps laid out in this book, you can literally invest anywhere in the world. But, as Jack learned the hard way, you need to do your due diligence on the market beforehand if you expect to invest wisely. That means understanding from a big level all the way down to the details you are going to rely on your turnkey partner to know. You don’t need to know the details of every neighborhood. You just need to know that your partner does and that it is not willing to compromise your investments to make money.

Some people say that the first thing you need to research when you’re thinking about investing in turnkey is your team. But in the Turnkey Safely System, “who” comes second. The first thing you really want to figure out is “where”: Which markets are right for you?

Not all markets are created equal. That’s why there’s no substitute for doing research before you invest. When you take the time to do this step right, you will end up with a list of strong cities to consider and explore for quality turnkey companies. Taken with the steps that follow, you will only review houses that meet your expectations from companies that meet your expectations in cities that meet your expectations. You will build a portfolio that will continue to prosper over time, effectively growing your investment. If you don’t, you risk ending up like Jack, saddled with terrible investments that push your goals out of reach.

Researching a market correctly means that you arrive at a decision based on facts, not emotions. You never choose a market because you visited the city once and liked it, or because your college roommate lives there. If you have a neighbor or family member that has invested in a city and she loves it, fantastic. Put it on your list to investigate. If, for some reason, you just really love the idea or thought of investing in a city, put it on your list, but if the data says don’t invest, you don’t invest. No matter how many times someone else tells you how great his investments are or how much he loves the city.

If you make a decision based on emotion, you risk investing in a shrinking or dying market. And that will ultimately compromise your vision.

Each year, new investment opportunities pop up in every city. But how do you determine which ones offer you a better return on your investment? What information should you be looking for? And even after you’ve determined that a handful of markets look like safe bets, how do you further narrow down your list?

The information you need to weed out the bad markets from the good ones is out there. You just have to know where to find it. In this second step of the Turnkey Safely System, I’ll teach you how to research potential markets so that you can make the right investment decisions for yourself and your family.

HOW TO RESEARCH THE MARKET: THE RESEARCH FUNNEL

Researching the market is a process that starts with a wide list of cities you’re interested in, and then narrows as you eliminate markets that are unsafe prospects for you. At Memphis Invest, we call this process the research funnel (see figure).

The research funnel

By the time you complete this process, you will have the one, two, or three cities that offer the best opportunities and biggest returns for your specific needs. The five steps of the research funnel are making a list, determining market stability and growth trends, determining job growth and industry diversification, reading local business journals, and researching the chamber of commerce and local blogs.

Step 1: Make a list.

At the top of the research funnel, you cast a wide net. Step 1 is where you make your list of all the markets you want to research.

The chances are good that you already have some idea of where you’re interested in investing. Regardless of how that list was put together, you have it and you need to commit it to paper. When you put your list together, don’t stop at the cities you have in mind right now. Think bigger. Where else might be a good prospective market for you?

You can actually lay out a map when you’re doing this and ask yourself, “What cities have I heard about that are good places to live and work? What are the big cities? What are the medium-size ones? What’s going on in Dallas? Is it shrinking or growing? How about Kansas City, or Cleveland, Ohio? How about Houston, or Oklahoma City, or even Memphis? What’s happening with those cities?”

Write down each city that catches your eye, and take some time to think about what you know about it. What about each of them interests you? Again, this list will be made up of cities you have included for many reasons. Just because you were told it was a good investment city or because you liked visiting, it doesn’t mean it is actually a good investment city. This is the step where we find that out. For now, include everything.

The more cities you research, the more options you have, and the better chance you have of finding a market or markets that are a perfect fit for you. Think of the world as your oyster during this step. Really take your time and look and don’t count anything out just yet.

Step 2: Determine market stability and recent growth trends.

Once you have your list, you need to go city by city for the rest of the research process. Step 2 is to determine the market stability and recent growth trends of the different cities on your list.

The first thing to look at for each city is the key indicator of its stability in recent years: its population. What has been happening with its population growth over the last 10, 15, and 20 years?

The best place to look for this information is the Census Bureau. Specifically, you want the last two censuses taken for that city and its metro statistical area (MSA). You’re looking for at least a break-even number in population growth. Even if an MSA has shrunk a little bit, there may be enough stability still there that the city is on its way to recovering. But you don’t want to buy investment property in a city that’s half the size it was in 1995.

The reason I look at both city and MSA data is that many cities are experiencing suburban growth around them, while the city centers and areas within city limits are not growing. Revitalizing dilapidated city centers is a huge focus for many cities, and attracting population growth inside city limits is difficult. So, it is important to look at the entire metro area to get a clearer picture of what’s happening with population.

Population isn’t the only indicator of stability in a city, as I’ll cover in a moment, and in some cases a recent population drop can actually be an opportunity to buy while prices are low and likely to rise again in the near future. If that seems to be the case, you’ve found a good reason to keep that city on the list.

You’re not going to cut out a lot of cities based on population growth alone. Instead, use it to get a feel for an area. Then continue to build a full picture of what’s going on in that market. Remember, population statistics only tell a tiny part of the picture. You are really determining that a city is not on a long losing streak that will be hard to come back from.

Step 3: Determine job growth potential and local industry diversification.

After you have an idea of population growth trends in the market you’re researching, the next question to ask is, “What’s happening with this city’s economic growth, and how is that affecting this market’s stability?”

The single most important factor in determining the economic stability and growth potential for a city is its industry. The number one reason people leave an MSA is that there are no jobs there. Lack of growth and vitality leave a city without a pulse. The lack of energy and diversification in the job market leaves a big hole for a city that is tough to fill. Therefore, you ideally want to invest in a market that is highly diversified.

Dallas is a great example of diversification. A huge percentage of jobs in Dallas are provided by almost two dozen different industries. There are 22 different companies from the Fortune 500 headquartered in Dallas. Those industries are so diverse (and growing) that any downturn in one or two of them hardly causes a ripple in the job market. If one of those industries—say oil, or airlines—is experiencing difficulties, there are still plenty of other opportunities to be found there. That is incredible diversification.

By contrast, some cities will have a single dominant industry providing jobs. In those markets, it’s important to know what that industry is and what the projections of its long-term stability look like.

Industry strength is an important factor. We found several years ago, in the first decade of the twenty-first century, the importance of not building city or even a region’s employment on the back of one industry and the ancillary industries that supply it. When the economic crisis hit in 2007, the auto industry ground to a halt.

American auto giants like Ford, Chrysler, and Chevrolet found themselves in an industry under siege. As the demand for new cars plummeted, so did the need for workers, production, plants, and offices. Thousands of workers lost their jobs. Not only the auto workers, but also the parts suppliers, the distributors, mechanics, steel workers, parts suppliers, and on and on and on. Down the list it went, and more and more workers lost their jobs.

Entire cities across the rust belt were decimated and faced a rebuilding effort without the advantage of job and industry diversification. These cities faced a crisis like they had never seen before, and to this day, not all of those cities have been able to bounce back.

Contrast that with another city that relies heavily on one industry. A city like Memphis is built on multiple different industries and has been diversifying for the past decade. However, one industry still dominates. Memphis is and always will be the transportation and distribution capital of America. If something ships, it probably touches Memphis at some point.

The difference between industries like transportation and distribution and the auto industry is that as long as America is producing goods, they will need to be shipped, warehoused, and distributed. The transportation industry will always be in demand and is one of the first industries to rebound after a downturn. As production begins to ramp up, the distribution model kicks in. That is a healthy industry that is going to be in demand regardless of market conditions.

How a city is going to fare in a downturn and how diversified or strong the industries providing jobs are is a tough call to project. That is why I caution that it is a small piece of your puzzle. It is a piece, though, and it is important. I would not suggest investing in a city that really lacks potential for growth.

Your best resource for researching the potential for job growth in a target city is Google. For example, if you want to know about job growth in Cleveland, just type “job growth Cleveland” into the search bar and read what comes up. The research and opinion has already been done for you. It is out there, you just need to spend some time finding it and reading.

Another good query to use is “net job growth” paired with the city name you’re researching. This will give you a picture of what’s really going on with employment in that area. What companies are moving in? Who is providing jobs? What industries are they in? The reason you want to check “net job growth” is that the rosy side of the picture is often painted brilliantly. You’ll find lots of hoopla about job growth. Finding out about job losses takes a bit more digging, and the net job growth figure takes both into account. A city may be adding jobs, but if it is losing jobs at the same rate, there won’t be much job growth. Make sure you dig for the whole picture.

Understanding job growth and industries goes a long way toward identifying stable markets. But you’re not done with the research funnel yet.

Step 4: Find and read local business journals.

The fourth step in the research funnel is to find and read a prospective city’s business journals. I prefer to invest in a city that is large enough to have a business journal presence, because that means there’s business, growth, and enough local industry to support and drive that level of local engagement. There are 43 different business journal publications, which provide a pretty diverse number of cities to investigate. That does not mean a city without one should be off your list. Oklahoma City does not have a business journal, and I am very excited about investing in Oklahoma City. But, the presence of a business journal is one of my key indicators of future growth and stability.

Go to Google and type in the city name along with “business journal.” If one or more business journals come up, you’re in good shape.

Once you’ve found your business journals, read them. What businesses and industries are making news here? Is there a story about one major local company whose stock is falling and that is laying off 50 percent of its workforce? These are things you need to know before you invest there, not after. A business journal exists in a city for one reason: to produce news stories about a city’s businesses and industries. Its journalists are going to be connected and get the word out quick on both the good and the bad. Local business leaders love reading them and rely on them for early indications of what is happening and to get the full behind-the-scenes details of the health of a city’s business climate. They are important.

Reading the city’s business journal gives you a sense of the local business climate. If everything still looks good at this point, you’re in good shape. There’s only one more test to pass in the research funnel.

Step 5: Research the chamber of commerce and local blogs.

The fifth step is to research the city’s chamber of commerce and local blogs. Any city that has made it this far in the research funnel very likely offers a safe, attractive market. But you may still have more markets on the list than you care to buy into. This step in the process is a way to narrow it down to the absolute cream of the crop.

Visit Google again, and this time look up the city’s chamber of commerce. When you find its site, download and read any brochures listed there.

When you do this, you have to keep in mind that this brochure is full of information viewed through rose-colored glasses. It’s going to be the rosiest, brightest version of the area you can get. There will be another side to the story of business and life in that city. Nevertheless, it’s the job of that chamber of commerce to know and market the selling points of doing business in that city. And that’s valuable information to you as a potential investor in the area. I want to get that picture of a city.

I also want to get the other side. You can find the unvarnished truth about doing business in a city by reading local blogs. These don’t even all have to be business blogs. They might be about food, or the schools, or the arts, or parks and recreation—all sorts of topics related to working and living in that city.

Reading local blogs doesn’t take long, and what you get out of it is an insider’s unfiltered view of a city. If there is dirt to be dished on a place, this is where you’ll find it. And that information is just as important in getting a balanced view of the local market as the polished marketing copy put out by the chamber of commerce.

Right now, you may already be thinking to yourself, “This is going to take forever!” This should be a quick exercise and not a dive down a rabbit hole. You are skimming across the top and just digging in below the surface. You do not need to know the facts for population growth for every year, and you’re not trying to determine migration patterns or determine exactly which jobs are being created and what the wages are. Those are in-depth questions that get answered later, and they get answered by the experts you are working with in your chosen market or markets.

You are spending maybe an hour or a little more on each market and quickly getting a feel for which markets need to be on your short list. You are eliminating the markets that don’t give you a good feel and highlighting those that do. That is all you are doing at this stage. Just because you highlight a city on your list does not mean you are going to invest in that city. There is still work to do. So, don’t get bogged down and don’t get discouraged thinking you are going to be spending hours and hours on research for each city.

You are simply narrowing your choices!

SHOULD I VISIT THE MARKET?

“Should I visit the market?” is a big question when it comes to turnkey.

The answer is no, you don’t need to at this point. You may want to at a future date, but right now put off the idea of traveling to the city. You can safely buy real estate without ever laying eyes on it as long as you know the facts. Instead, you visit the market for confirmation after you’ve chosen it and decided on your turnkey team.

The reason you want to do it this way is that you don’t know what you don’t know. If you go to a market before you have a team, you don’t know what you’re looking at. You have no clue. Some people try to do super detailed research. “This is the best zip code based on the best school rating and the crime reports,” they decide, and they start driving through neighborhoods. When they get there, they think, “All of this looks really good. Yeah, I want to buy here. This is the neighborhood I want to buy in.”

But they don’t have a team in place. They don’t know what the locals know: that that street of houses is actually bad because the shoulder is split down the middle of the road. They don’t know the little things that make houses stand out or not stand out to people who live in the area. They lack the knowledge that a local provider is going to have. The knowledge that says from this point north the homes are good, but south on this same street is less desirable.

It is the difference between success and failure as an investor, and visiting a city without knowing what you are looking at only adds to confusion. Don’t be that investor.

Cities are going to look extremely similar on the surface. Knowing the subtext is what matters. You don’t need to drive yourself around a strange city, figuring out where the crime is and where the good schools are. That’s not your job.

Your job is to trust the research you did on the market—and the reliable team that you ultimately hope to find to work with you there. That comes next in the process. The best thing you can do as a passive investor is inform yourself on the markets you like, make your list, and move to the next step of the process. There will be a time for visiting a market when you are ready to meet a team.

AN INFORMED MARKET DECISION

At the end of the day, a house is a house. But a city is not just a city. You need to know the stability and economics of a local market before you decide to invest there.

The five steps of the research funnel may sound like a lot of work, but they’re not. You don’t have to write a 20-page thesis on each city. A couple hours here and there is all it really takes to do this right. Check your facts and jot down some notes. At most, you should be spending just a couple of nights per city.

None of the five steps of the research funnel is enough, on its own, to say yes or no to a market. But all of them taken together will present you with a full picture of what’s going on in that city and help you answer the question, “Is this place a good investment city for me?”

Determining which markets are good and safe simplifies your decision process and paves the way for your personal turnkey revolution to take place. Don’t make the mistake of investing in a market you haven’t investigated and vetted. No matter how you have initially built your list—if you added cities because you visited them or your best friend or boss has an investment property there—you must arm yourself with the facts and stay informed.

At this point in the Turnkey Safely System, you’ve learned how to use the research funnel to weed out unsafe markets and identify the best of the best. You know where you want to invest, but you can’t do it alone. In the next chapter, I’ll teach you everything you need to know about how to choose the right team to manage your turnkey investment.