Yes But Why THAT One?

As I move between the worlds of residential and commercial real estate I’m realizing more and more that the fundamentals of both are a lot alike.

Having spent the last few years building up a portfolio of single family rental properties, I’ve developed some very strict and specific criteria to use in my screening process. It’s interesting to note in retrospect though, that my criteria has gotten more and more specific, and therefore more narrow, over the last two years or so.

And it’s not too difficult to understand why.

Just a few short years ago, the hardest part of this business was finding any properties at all that met your very basic criteria. There were only a few foreclosures, and everybody with a home equity loan considered themselves an investor so competition for properties was fierce, which in turn kept prices high.

But as everyone knows, that situation has reversed. Instead of there being a shortage of investment-type properties there is now a glut. A HUGE glut. And that’s a bigger problem than having too few properties.

So that has lead to me tightening up my criteria – significantly – over the past 18 months and getting a lot more choosey about what I buy. Where before I was satisfied with three bedrooms and a basement, my minimum criteria now includes a lot more, such as a brick exterior and a partially finished basement, among many other things.

To the extent that I now know the exact city, neighborhood, streets, and interior and exterior features that I’m require. So if someone asks – “Yes But Why THAT One?” I can answer – definitively and authoritatively – because I know why EACH of my criterion exists.

And I’ve targeted this so narrowly that quite by accident I’ve created a mini “brand” for my rental properties that so far has attracted two top notch tenants solely by word of mouth. (Largely due positioning via a very basic lead-generation website at EastSideRenters.com.)

It took having lunch last week with Eric Brown**, the owner of Urbane Apartments in Royal Oak, for me to realize that this fundamental question needs to be asked when buying commercial properties as well.

Up to this point in my “Apartment Quest” I had been focused pretty much exclusively on the numbers – the return on investment in particular. (I’m a finance guy. What can I say? And I haven’t found a 12 step program for this yet.) And while I had a couple of basic criteria in mind, when he asked me basically “Yes But Why THAT One?” I didn’t have an answer.

So one of my (many) big take-aways from my lunch with Eric was actually something that I’ve known for a while about single family residential properties but not applied to apartments. And that was that the best buildings and the best locations are those where tenants have a compelling reason to move there. And that helps you to, as he says, “break from the apartment commodity”.

And this has caused me to rethink my criteria and approach for buying commercial property.

**Check out Eric’s Urbane Apartments website at www.urbaneapts.com. He has a truly extraordinary business model.