In this episode, we’re joined by the host of the Target Market Insights Podcast and co-founder of the Midwest Real Estate Networking Summit, John Casmon. John is also the founder of Casmon Capital Group, where he has helped families invest over $70M into multifamily apartments to create generational wealth.
Today we discuss the various aspects of choosing the right investment market, including picking property or market first, job and population growth, supply and demand, and much more. As always, we will also discuss how John handles accounting taxes.
At the end of today’s show, you’ll hear the premier of our new segment! After Brandon and Thomas speak with John, they will share their thoughts about the topics discussed and answer questions sent in by listeners in a Q&A format.
Identifying a Market First vs. Identifying a Property and Vetting the Market
It’s most important to identify the market first. More important than the MSA (Metropolitan Statistical Area) is the sub-market. For example, just because Dallas is a great market does not mean that there are many areas you want to avoid. Similarly, a market with low or no growth likely has several areas that could be great for investing. The point is to understand the market at a local level.
Always look in your backyard first. It’s a great place to start, you know the area and the ins and outs of the local economy. First, look for growth - primarily population growth and job growth.
Next, you want to understand how friendly the market is from a business standpoint. Is it landlord friendly, will the area continue to attract jobs?
Don’t make the mistake of only looking in the rearview, it’s important to forecast forward to determine what will happen for you in the future after you buy the property. The past is a good indicator, but understand the factors behind that growth. Specific historic numbers aren’t as important as a trend in the right direction.
Risk Factors for Secondary and Tertiary Markets
Look out in general for markets that rely on one industry or a small number of large employers. 25% or more of the jobs in one market are in one industry is considered highly reliant.
If so, dig deep on the industry and employers. Investigate the company, check out the financials, read executive summaries and understand their plans for the future. This will help you understand if they have expansion projects in place to remain relevant or if there is potential they could diminish their involvement in the community or move locations entirely.
If these companies leave, the impact can be huge on the community and ancillary services such as laundromats, restaurants, and retail.
Resources to Achieve this Level of Due Diligence
The likely scenario is that if you like an area, someone else likely has seen these factors and is pursuing that market as well.
For single family rentals, it’s generally okay to go with your gut and invest in an area in which you would live. Is it a market you want to live in? Is it a market you will visit? For larger investments, or investing with other investors, the numbers become much more important. city-data.com/.org is an example of a resource that describes current demographic info, historic views, as well as census.gov. In multifamily, large brokerage forms will have a listing.
Accounting and Taxes
Real estate taxes are extremely complex. Unless you’re working with a professional who essentially is focused solely on real estate taxes, you’re probably going to leave some opportunities on the table. Many CPAs, even investing CPAs, just don’t understand the ins and outs of real estate tax.
If you’re going to invest in real estate and you’re going to build a portfolio, you need to get a real estate CPA. At a minimum, have a consultation with a real estate CPA to make sure you take advantage of everything available to you. For example, a cost segregation to take advantage of bonus depreciation. For many investors, this bonus depreciation will show a loss year one. Even though they made a return, you’ll show a paper loss and use those losses to offset against other passive income gains.
Learn more about John and his work at: https://www.casmoncapital.com/
Brandon has also written an article for BiggerPockets about this subject, check it out below!
Helpful Resource: Comprehensive Annual Financial Reports. You can search CAFR-CityName or CAFR-CountyName - an audited PDF describing the financial performance and demographic information about the area.
Question: How do you see your real estate investors expense their cell phone bill? If you’re mostly a passive investor and only speak to your PM a couple times a month, is that sufficient for a write-off?
Answer: The expensing is proportionate to the amount of time that you use your phone for business. Keep track of this on an ongoing basis for record-keeping purposes.
If you’re mostly passive, it depends on the type of business you have. These situations will be unique. Typically you can, but if you are an LP in a syndication for example, you aren’t actively participating in the operations.