Suppose your life’s ambition has been to open a grocery store where you plan to sell one item and one item only: pickled squid. Can you picture it? Rows and rows of squeamy, squirmy, flesh-colored pickled squid, as far as the eye can see…
What are the chances this new venture is successful?
Somewhere between slim and none? Exactly. So why then would you want to put all your private lending eggs in one equally flawed basket?
Most private lending newbies mistakenly think they should target one, single market – but this is just as insane as opening a store that only sells squid. What you really want is multiple markets.
And in this case, three is the magic number…
So what attributes should these 3 target private lending markets possess?
When assessing the characteristics of a viable target market, the first thing you want to consider is how quickly inventory is moving. You want to find a spicy-hot market. Ideally, properties should be selling within 45 days or less. In a really good market, they’ll be selling 7-14 days after their list date.
Unlike pickled squid, your target market should also have high demand. Buyers in these markets have good, stable jobs, and are looking to move into slightly higher than median priced homes. They have good credit, and are taking full advantage of the exceptional financing options available to them.
These buyers also don’t even blink at 20-30 percent cash down payments. They want turnkey properties with granite in the kitchen and all of the bathrooms, plus nice landscaping to boot.
Guidance for finding your 3 markets
One of the first places you should begin your search is by checking out Standard & Poor’s Case-Schiller Home Prices Index. Standard & Poor calculates several free reports on a monthly basis: a national home price index, a 20-city composite index, a 10-city composite index, and 20 individual metro area indexes. This information should help you to identify the top 10 markets nationwide with a recent increase or stabilization in values.
Your challenge is to then choose 3 markets from this list.
Keep in mind, this list if for guidance. Nothing beats tapping local intel of realtors, brokers, associations and members of your private lending community (you’re a member of a [private lending community], right??)
How this keeps you from selling pickled squid
Remember, the pickled squid isn’t the problem. The problem is the risk associated with building your entire business plan around one, exotic and ridiculously narrow market. It’s a gamble. And your goal should be to avoid volatility whenever possible.
Diversification is a critical key to achieving arbitrage, and avoiding catastrophic failure. What happens if despite your careful research and planning, one of your 3 markets proves to be a total bust?
Thankfully, smarty pants you has two other markets in your pocket. Can you imagine what could happen if this wasn’t the case?
I don’t live in a top private lending market… are you saying I have to move?
No. In our interconnected, skype and video world, this is not a major problem. However, you do want to consider this. If both you and your prospects are press the palm flesh kind of people — and you’re not within driving distance — it can make relationship building a smidge more challenging. Fortunately, there’s planes, trains and automobiles for sealing deals that warrant it in person.
Some lenders become discouraged because they insist on working a market that is convenient, rather than selecting a stronger market with greater money making potential. Don’t settle for easy. The question you have to ask yourself is, are you willing to put in a little elbow grease and travel time (if need be) – in order to enjoy the lifestyle you always dreamed of living?
No matter how you slice it, 3 Markets are better than one
Don’t make the silly strategic mistake of focusing on only one market. Play the smarter odds, work 3 equally strong target markets. These markets should be smoking hot, with qualified borrowers looking for the great deals you can structure. Do your research, and talk to others with more experience about the markets you are considering.
If you do these things, I promise you’ll end up making a lot more money than with your pickled squid business.