Researching and Choosing the Right Market
Part I
Investing in multifamily apartment buildings is a big financial undertaking, and the whole process shouldn’t be taken lightly. It calls for surgical grade due diligence, several rounds of brainstorming/research, building a solid team, and understanding the ins and outs of buying & executing rights in the market.
That’s why we have put together this multi-part series designed to help you delve into the world of investing in multifamily apartments. In the first article of this series, we will focus on the very first step that you need to take: research and choose the perfect market for your investment needs. We’ll cover the nitty-gritty of doing thorough market research, as well as tried-and-true tips and critical things to consider when choosing the right apartment.
Let’s get right to it.
What to Look for When Evaluating a Real Estate Market
Putting your money in the wrong market can turn into a huge financial and psychological nightmare. The last thing you want is to invest your hard-earned capital in an extremely low-cash or under performing market. Your money will get tied to “bad” properties that you cannot sell, and if you do eventually decide to sell, you might not turn a profit.
If you don’t want to end up with the so-called lemon apartments, here are 5 crucial criteria that we recommend that you use to analyze potential markets. You should pay close attention to these five attributes to zero in on a market that will likely deliver high returns on your investment.
(1) Employment Opportunities and Job Growth
You have probably heard the common cliche that the number one rule in real estate is location, location, location. Yes, a strategic location is crucial for multifamily apartments, but so are job opportunities. After all, unemployed people don’t have a source of income, which means they can’t pay rent.
If you have come across an apartment deal that seems too good to be true, then make sure you do your homework properly. Chances are, there is a high unemployment rate in the market. So, the first thing you should consider in a new market before you invest your dollars is the unemployment rate, job availability, and prospective employers.
Jobs do more than create income streams; they also drive an influx of new people, as well as create other employment opportunities. In reality, a single white collar job can lead to the creation of 2 to 5 blue collar jobs.
As a rule of thumb, we suggest that you look for markets that have experienced minimum job growth of 2% for the last two years running. This should be coupled with an unemployment rate that’s below 5%. That’s because anything lower than eight percent means the vast majority of residents (read: potential renters) are able to get gainful employment.
Google is your BFF when looking for relevant job data. Just search the name of the market/city alongside the terms “unemployment rate” or “job growth”. Google will return a treasure trove of job and employment information that will help take your research to the next level.
Other resources include the US Census Bureau, Best Cities, National Multi Housing Council, CBRE, USA City Link, CoStar, City-Data, and Local Market Monitor.
Side tip: Look for markets with a median home selling price that is $90,000 or higher. If it’s lower than $90K, people will prefer buying a single family home rather than rent. Also, check out the vacant housing rate, which shouldn’t be higher than 20%.
(2) Household Income Growth
You probably want to know the number of households in the market, as well as their incomes. Besides job growth, income growth is also critical when evaluating a market. Rising income means that the local economy is flourishing and experiencing an upturn. That’s where the US Census and household income data websites will come in handy.
(3) New Constructions
A growing number of constructions and new developments are a sign of an emerging market that has huge investment potential. For this, you will have to visit the town hall of the market you are researching to find out the number of building permits recently requested. If the number has gone up in the last two to three years, then you have stumbled upon an opportunity: a growing or emerging market.
Side tip: Look out for New Construction vs Absorption. The absorption rate indicates the rate of which units rent in a given area over a given time period. It’s calculated by dividing the number units available for rent by the number of units rented each month. High observation signals a strong rental market with solid demand, while a market with low observation signal a market which could be facing an over supply of units, concession and potentially lower rents.
(4) Population Growth
People don’t move to under performing economies. Markets with burgeoning job opportunities and thriving local economies are likely to pull in new people from left, right and center. That’s a good thing for you because it shows that prospective tenants are arriving in great numbers.
With that being said, you should be looking for areas with significant population growth, especially metro areas. These are the so-called ’emerging markets’ that represent an opportunity for investors to get in early and reap the rewards later on. We focus on emerging markets and solid linear markets that offer solid long term cash-flow with strong local economy.
As you might expect, markets experiencing population influx or balanced supply and demand enjoy lower vacant housing rates, higher cash flows, and higher rents. When researching a market, get answers to these three simple questions:
- What’s the current population of the neighborhood, market or sub-market you are researching?
- What was the population three, five or ten years ago?
- Once you crunch the numbers, is the population burgeoning or plummeting?
(5) Several Big Employers
How many large employers are available in the market or sub-market? Are there potential big employers looking to open shop in the market? No matter what, stay away from a single-employer market. If that employer sinks, the whole market tanks, taking your investment down the drain with it.
Side tip: Call the local Chambers of Commerce to discuss the local business economy, whether new businesses are coming to town or existing ones are expanding, and the local path of progress. Once you have chosen a market, keep up to-date with the local economy and business community
Wrap-Up
Now that you have done top-down market research using the five crucial criteria, it’s high time you make your choice. You’ll probably want to get in touch with a local broker and lender to discuss the market, do a reconnaissance visit, and finally schedule appointments with property managers.
More importantly, you have to build your team, which takes us to the next article in the series-stay tuned.
“live where you want to live, and invest where the numbers make sense”
– Robert Helms