Next time you talk with your favorite Real Estate Professional – ask them “how do you generally think about Markets for real estate investing?”
See how they respond. I bet you are going to get a different answer every time, each of them telling you more about what they do for a living than anything else, and all equally wrong!
There are only Three Markets to consider when evaluating any real estate investment.
I can prove it.
What do you think they are?
The Three Markets Defined
1. The Property Market: The Property Market comes first because it is the most intuitive. When most people think about real estate markets, they think about what is for sale, what has recently sold, and at what pricing. This is correct, but incomplete. The Property Market also includes new development, redevelopment, demolishion, leasing, subleasing, absorption, occupancy, rental rates, and vintage of every building. It encompasses anything and everything related to the physical quality and status of the subject property and all relevant or alternative properties and spaces in the subject geography or alternative competitive geographies. The Property Market is the Physical Realm of Real Estate Investing.
2. The Capital Market: The Capital Market, refers to all the capital available for investment in the market. The Capital Market is the most dynamic and complex of the 3. It includes: Public and Private companies and funds, Fund Managers, Debt and Equity, Conventional Banks, Insurance Companies, Credit Unions, Bridge Lenders, Mezzanine, CMBS, Small Business Lenders, Hard Money – all different kinds of capital, even Crypto today! Each type of Capital comes with different terms and often has hugely different preferences. The Capital Market is the Spiritual Realm of Real Estate Investing.
3. The Brokerage Market: The Brokerage Market, is the Market of competing brokers. Simply put, it is the exact size of the number of brokers competing for a given assignment. Typically, brokers compete in either well defined markets, or well define service specialties and every combination in between. In most places there are several brokers with similar specialties in all areas that compete for all kinds of brokerage business. The Brokerage Market is the Human Realm of Real Estate Investing.
Each of the components in each of the 3 Markets must be in perfect order with the goals of the parties to ensure a perfectly copasetic transaction. (This is not easy to orchestrate, without a Maestro!) When even a small disturbance exists in any of the above, the risk of a deal “going sideways” and ultimately “blowing-up” increases tremendously!
I hope this helps simplify your real estate investment decisions, I know it has been helpful for me as I look at various deals, and I know it has been appreciated by many I’ve shared it with.
Please let me know if you find this helpful, or if any better examples come to mind!
Sincerely,
JH
