One question we at Worcester Investments often hear is why our real estate investing strategy is so focused on one local market—in our case, the Kansas City metro area. It’s a fair question. We have a large team whose experience spans all areas of commercial real estate, we own and manage thousands of units of multifamily property, and we’ve raised tens of millions of dollars in private equity to fund our growing portfolio. We’ve clearly developed a successful strategy for acquiring, renovating, developing, and managing real estate—so why not replicate this success by targeting more properties around the country, or even internationally?
This post will answer that question in detail, but here’s the key takeaway: Contrary to a common misconception, there is no such thing as “the real estate market.” Real estate itself is a hyper-local asset class. Every property’s sale price, market value, and ability to generate revenue will almost always be more sensitive to local than national or global factors.
That is why Worcester has focused exclusively on one local market—Kansas City—for our company’s entire history of real estate investing. The US is comprised of hundreds of individual real estate markets, each with its own demographic, local economy, and a mix of unique features that attract residents and businesses (or drive them away). Our focus on a single real estate market has given us an unmatched understanding of that market’s unique traits and nuances, which helps Worcester offer our investors a much greater chance of strong returns than had we adopted a scattered approach and acquired properties in markets where we didn’t have expertise.
Now let’s discuss a couple of specific reasons that focusing on a single local market can add value to your real estate investment strategy.
Many real estate appraisal management companies will not allow their field appraisers to cover more than a couple of counties. These companies are in the business of estimating property values for their clients (usually mortgage companies and banks), and they know an appraiser simply can’t develop expertise in more than a couple of markets. Too much can change from one neighborhood to the next, even if they’re just a few miles apart. An appraiser trying to cover a lot of territory will almost certainly miss some of the unique details affecting property value in any given market. There’s an important lesson here for your own real estate investing strategy.
When you become hyper-focused, when you put all your effort into developing expertise in a single real estate market, you can learn to see things other investors won’t. Your steady research of the region might alert you to planned development that suggests a property on the market now is poised to increase substantially in value in the coming years. That’s something a remote investor or someone new to the region might not be aware of.
Just as there is no such thing as a national real estate market, in which all properties across the country perform the same way at the same time, there is also no such thing as a national set of rules for real estate owners. Local markets each have their own permitting and zoning guidelines. Some markets allow for a certain type of addition to a property, for example, while others do not.
If you plan to acquire a piece of commercial property with the intention of performing specific upgrades or additions, you will need to know that local market’s rules of the game. Will the permitting process, for example, take so long and require so many interim approvals that it will be cost-prohibitive? Is it even going to be legal at all in the local market where you’re looking to buy? If the local zoning won’t allow it, can you still make the property profitable?
Concentrating your real estate investment efforts on one local market will help you learn these rules of the game, so you won’t fall victim to these types of rookie mistakes, which are common among newcomers to the market or out-of-town investors.
Finally, when you concentrate your real estate investment efforts in a single local market, and build your portfolio of properties exclusively in that region, you can also benefit from developing a strong network of professionals—landscapers, real estate agents, contractors, plumbers, electricians, etc.—businesses you can work with on all of your properties.
Think of it this way. If you owned an apartment building in Kansas City, another in Philadelphia, and a third in Bakersfield, California, you would obviously need to contract your landscaping services to three different companies. For each of those companies, you would be a client with one property. But if you owned three buildings in the same local market, you could work with one landscaping business—and you’d be in a much better position to receive better terms from that company and to be treated like a VIP.
Remember, no investors actually manage their real estate investments entirely on their own. We all need to enlist the services of professionals. And the more geographically concentrated your real estate portfolio, the more you can reap the benefits of working with the same professionals for all of your properties.
If you’re looking for the easiest and most passive way to benefit from locally focused real estate investing—in other words, investing without having to acquire and manage any property yourself—let us introduce you to The Worcester Fund, from Worcester Investments. This fund, which has earned an annualized return of 10.44% for 2018, invests exclusively in multifamily properties in the Kansas City metro area.