Which Investment Strategy Is Best?

TruePoint Capital

When it comes to identifying a market or markets for investing real estate dollars, key decision-makers tend to box themselves in – either focusing too much on the macro market or losing the forest for the trees by paying too much attention to the micro-market.

Real estate investors who cling exclusively to a macro view or a micro view potentially rob themselves of investing in the best key markets.

This is because macro-focused investors look mostly at the larger picture of the real estate market. They consider factors such as the economy, interest rates, unemployment, macro trends, tax rates, and politics.

In the alternative, micro-focused investors tend to stick with what’s familiar – their current city of residence, down the street, or somewhere they’re familiar with – usually losing sight of the big picture.

Having local market knowledge and boots on the ground offers certain advantages for sourcing deals, but it can also cause investors to miss big-picture trends.

There’s the concept of availability bias in behavioral finance, which says stock investors will gravitate towards convenient stocks and don’t require any work or additional research because everybody else in the news and social media is talking about these stocks.

Availability Bias Permeates A Lot Of Our Decision-Making

Imagine buying a used iPhone for your kids. It’s a starter phone, so you see no point in paying top dollar. You want to touch and feel it before paying for it, so you check the local ads or Craigslist. You saved a couple of hundred bucks by staying local. Still, if you had expanded your search, you would have discovered multiple resellers selling refurbished iPhones for less money but with warranties.

Just as availability bias can make you miss out on better deals on used iPhones, it can cause real estate investors to miss out on better deals elsewhere. The other danger with being exclusively micro-focused is if you don’t look at the macro trends and economic indicators, you may be investing in the wrong segment altogether.

Unfortunately, micro-focused investors are often overconfident in their abilities, assuming that they couldn’t possibly get it wrong because it’s in their backyard.

You may see a killer retail opportunity down the street. Still, if you’re not paying attention to the broader economy that’s screaming inflation and high unemployment, retail may not be the wisest choice in any market.

The macro-focused investor makes the mistake of over-generalizing – assuming that what’s happening on a macro level is happening to the same degree to every asset segment and geographic market.

As the pandemic-induced downturn proved in 2020, a general downturn doesn’t affect every real estate segment equally and certainly not in every market. Investors who sat 2020 out because of a perceived lack of opportunity, potentially deprived themselves of income and growth opportunities.

Throughout my real estate investing career, I have found that incorporating both a micro and macro strategy is essential for making informed decisions and identifying the best key markets.   

Investors worried about inflation and unemployment may look to recession-proof cash-flowing alternatives to Wall Street on a macro level. This may then veer them towards commercial real estate in the multifamily or affordable segments. It’s at this point that a macro/micro strategy becomes important.

Even though your macro analysis points to a positive forecast for multifamily, don’t assume that every market will be equally desirable. You still need to look at the micro metrics.

For example, if you had invested in multifamily in a market like New York City with negative net migration, you would have made a bad investment where NYC saw one of the biggest dips in vacancies and rents of any major city in the U.S. in 2020.

Don’t stop at your macro analysis. Instead, take it one step further and study individual micro-markets to identify the best key markets. Then, look at the local trends, demographics, and economic indicators.

You’re thinking to yourself:

“Even if I take a macro/micro approach, I would still be limited to the number of markets I can invest in by the number of micro markets I’m familiar with.”

A macro/micro strategy does not have to limit you to the number of micro markets you can invest in. The beauty of commercial real estate is that you can partner with experts in their local markets to diversify your portfolio and identify the best key markets.

Of course, there are micro-markets in which I have significant experience and knowledge. Still, for investing in other markets, I will team with seasoned professionals who are masters of their markets.

Leveraging the expertise of others is the key to using an integrated macro/micro investment approach that allows you to latch onto big picture trends while targeting local markets with strong economic indicators to identify the best key markets for investing.

Smart Investors Do Not Limit Themselves To Either A Macro Or Micro Strategy

Instead, they incorporate both by looking at the big picture. They identify promising markets outside of their local stomping grounds while being mindful of the unique trends, demographics, indicators, and characteristics of specific markets that make those markets special to maximize their potential investment returns.

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