Start Where You Can Scale
How to achieve strategy-market-fit
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Everyone’s heard of ‘product-market-fit’, but very rarely do I come across investors who understand ‘strategy-market-fit’.
They make the common mistake of picking up one or maybe even two smaller properties in a new city, without any intentions or means of buying the next 10 - 20 doors.
In the end, they scratch the surface of a market but never dig deep enough to build a meaningful portfolio and lasting presence.
This is the wrong way to expand.
Wherever you choose to plant your flag, you want to ensure that there’s a clear pathway for you to continue scaling within that market.
This is where strategy-market-fit comes into play.
There is no Webster definition for strategy-market-fit, but the framework boils down to this:
Ensuring that your growth strategy is in alignment with the market(s) in which you choose to invest.
This entails validating 3 key metrics - inventory, pricing, and infrastructure.
Inventory
Are there adequate deals?
If you’re going after vacant lots, it’d be tough to build a land bank in a hyper-developed urban core hub.
If you’re focusing on small scale multi-family, you probably won’t have much luck in a newer suburban leaning city.
If you plan on building a massive cache of condos, then sprawling markets largely comprised of single-family detached homes wouldn’t be the best place to start.
Whatever asset type you choose to go after, you want to make sure that there’s plenty of deals to go around within that market.
Scarce opportunities and limited deal flow, lead to tougher competition and slower growth.
Neither of which aid your efforts, and both dynamics make it exceptionally hard to scale a decent sized portfolio.
Pricing
Can you afford to continue buying?
Unless you have access to outside capital, you want to ensure that you can afford to buy not only your first deal, but the next 10 - 20 over the coming years as well.
Capital constraints will undoubtedly handicap your growth, and ultimately it can lead to a forced early exit from the market altogether.
Making sure that property values and your savings rate are in-sync with one another is critical. If acquisition costs are rising faster than you can stack down payments, you’ll quickly be priced out of the market or squeezed into less desirable, lower-tier sections of town.
Depending upon how large you’d like to scale, you should aim to add at least 4 doors a year to your portfolio. If that’d be a stretch, it may be worth it to explore alternative markets with a lower capital barrier to entry.
Infrastructure
Does the public infrastructure support your operational plan?
Traditional long-term rentals don’t require anything special. If you’re providing quality housing at a fair rate, keeping your units leased shouldn’t be an issue.
But short-term rentals, vacation-homes, and mid-term corporate housing are a totally different story. The market has to support the method (i.e. rental strategy), and this largely comes down to public infrastructure.
Unless you’ve designed a remote getaway for visitors to unplug, short term rental and vacation-home markets necessitate proximity to amenities. Travelers want to be close to the action. Whether it’s an amusement park like Disneyland, or a natural wonder such as the Giant Sequoias along the northern coast of California, most people prefer to be within a short-drive’s distance to whatever attracted them there.
The same goes for those traveling for work. If your market lacks a corporate presence, doesn’t have an international airport, or is devoid of decent public transportation, it will be hard to attract the traveling execs and travel nurses that often make mid-term rental strategies work.
Making sure that your market of choice has the necessary infrastructure to support non-traditional rental strategies is one of the very first things you should validate before you go excel-spreadsheet-crazy; running numbers like a modern day Will Hunting.
The excitement of breaking into a brand new market and taking down deals often leads us to skip a couple of steps. The issue is that these hasty one or two steps forward, can easily set you ten steps backward.
Take the time to answer the obvious questions:
Are deals easy to come by in this market, or am I constantly looking for the needle in a haystack? This will indicate whether or not there’s sufficient inventory.
Can I afford to continue buying in this market? This will tell you if you’re capitalized well enough to scale.
What would draw vacationers or traveling professionals to this market? This will tell you which operational strategies make the most sense.
If these questions sound a bit ‘no-brainer’, it’s because they are.
Validating strategy-market-fit isn’t rocket science.
It just requires discipline, foresight, and a willingness to zoom out before you dive in.
What’s your take on today’s topic? Do you agree, disagree, or is there something I missed?
If you enjoyed this read, please share it so others can gain value as well.
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