competitive_advantage_real_estate

This article is about helping you to identify and profit from uncommon competitive advantages in a local market or a small section of a larger market.

In business, like in sports, we are always seeking a competitive advantage (or edge) to help us win. When I played football at Clemson University, my edge was preparation. I watched more film, worked harder in the weightroom and conditioning, and practiced more consistently than most people around me.

In real estate, I like to think I’ve carried over that same edge of preparation — but when I started 12 years ago, I quickly learned that “real estate investing” is just too big of a sport to prepare for. I had to divide it into smaller pieces before I could really study it, improve my skills, and gain my edge. In other words, I had to get small before I could get big.

Gaining a Competitive Advantage By Getting Smaller

The smaller pieces of my competitive advantage started by defining my real estate niches. My niches have typically included fix-flips and turnarounds of distressed buy-and-hold rentals in quality locations. From there, I got smaller still by becoming very good at particular creative financing strategies. I have written a lot about my creative financing toolbox and why I prefer creative deal structuring. These have certainly created a competitive advantage because when I meet with sellers or private lenders, I have more options and expertise than many other people they talk to.

But there is still one more competitive advantage that also benefits from getting smaller. This advantage concerns WHERE I choose to invest. When you start investing, you’ll have to decide whether to go all over the country, all over a city or region encompassing one million people, or instead find little investing pockets within towns or neighborhoods of a larger region. I have chosen the last option.

In other words, I try to become a big fish in a small pond. The “pond” is my small local market or a slice of a bigger market. A “big fish” is just someone who knows that market really well and who “swims” around the entire market over and over until it becomes very familiar and cozy.

Remember, the competitive advantage I’m talking about is preparation and specific knowledge. The more you reduce your market’s size, the easier it is to study and profit from it.

There are plenty of bigger, more impressive fish in the open oceans who cover huge market areas (i.e. hedge funds, REITS, syndication investors). But huge fish are always hungry and can never stop moving. That’s not for me. A simple little pond or two will keep a small investor like me well fed, safe, and happy for the rest of my life. Plus, the shallow waters and small deals of my little ponds are often not even worth the time of the big fish.

Related: 5 Ways to Stand Above the Competition as a Property Manager

The rest of this article will explore three uncommon ways to become an expert in your local market and to become a big fish in your own small pond (or multiple ponds). These uncommon methods include studying your local:

Rental ordinances
Comprehensive plan
Zoning ordinances
#1 – Your Local Rental Ordinances

Many cities and towns decide to regulate rental properties by creating a rental ordinance. On the surface, we landlords might not like more restrictive rental laws, but like every problem, there is typically a hidden opportunity if you keep digging.

I am going to tell you a very specific example in my own market that I think will give you a more universal sense of the opportunity available if you know your local rental ordinances.

I live and invest in the small college town of Clemson, SC, which is dominated by Clemson University, which has 20,000 students. While most students live in apartments, in the past some students piled 3-5 friends into a house in a residential subdivision. The worst of these houses often hosted loud parties late at night, left trash everywhere, and constantly tore up yards with their cars. Neighbors continued to complain, and one year city council decided to put an end to the problem.

Our city council created a rental ordinance, which required all landlords in neighborhoods with single family or duplex zoning to have a yearly inspection by a city official and to pay $100 for a rental license. The inspection included a list of safety and cleanliness items, but most importantly, it also limited the number of unrelated occupants who could live together to only two people. This means three friends could not live together, even if the house had four bedrooms.

But there was a big exception to this ordinance. Anyone who licensed their rental at the time of this ordinance could grandfather in their occupancy status and still have three unrelated tenants instead of two. This grandfathered license could be inherited by someone who bought a property!

The opportunity here is that of grandfathered rental licenses. In my case, the ability to rent to one more student could represent a real increase of income potential and thus a real increase in value of the house.

You may not have this exact ordinance in your town, but my point is to look for something that is restrictive or expensive in a local ordinance and find out if there is a grandfather rule. If so, you could target those properties and buy them knowing their true value.

#2 – Your Local Comprehensive Plan

A comprehensive plan is as close as you will get to predicting the future in your local market. It is created by city planning officials every 10 years in order to create a sort of roadmap of recommendations for the city’s elected officials, staff, and citizens as they manage the city over that period of time.

Usually, there is a master plan for the entire community, and then often there are many smaller master plans for neighborhoods or communities within the city. See …read more