Identifying a great market to invest in is imperative to having a success in multifamily real estate. There are countless markets and sub-markets an investor can choose from across the Unites States depending on their goals and investment criteria. In some markets it is difficult or near impossible to find cash flowing properties and most investors purchase only for appreciation. One such example is the New York City metro area. Properties there infrequently cash flow because of high property taxes, high insurance premiums, and high per unit purchase prices. This does not fit our syndication investment model, so we do not consider New York City when researching a market.
Many expert investors recommend investing close to your home, usually within an hour. They have various reasons for providing that advice but often it is because they are believers in self managing your properties to increase cash flow in the amount that you would have paid a property manager. That may be well and good for small-scale single-family rentals but for larger properties we will employ professional management so investing in our backyard, while nice, is not necessary. When selecting a market, we focus on 6 important criteria
Strong government leadership
This is the most important factor when we research markets, we want to see positive job growth across multiple employment sectors. The reason for this is simple, job growth is the lead contributor behind many of our other key criteria. If there is negative job growth there is likely negative population growth meaning there will be fewer households needing a residence. On the other hand, the demand for housing units will increase as the population of a market increases due to job growth.
The types of jobs that are contributing to the job growth is also important. It is estimated that for each white-collar job that is created, between two and five blue-collar jobs follow, these are the convenience store workers, the fast food workers, the Target, and Wal-Mart workers and many more. For an operator who focuses on B and C class assets the blue-collar workers are our bread and butter.
While researching markets one of the easiest ways to find information about job growth is to google the city name with "job growth." You can also use the website www.bls.gov, or www.census.gov to find data for a specific city. You should become familiar with the major employers in the market and be on the lookout for new or large companies announcing moves into the market. There have been two announcements recently that have caused a lot of chatter in the real estate world, Amazon's HQ2 in Arlington, Virginia, and Tesla's opening of a plant outside of Austin, Texas.
We focus on household growth rather than simply on the population growth within a market. The total number of households will give you an idea of the total number of renters there are in a market while the total population will only tell you how many people there are. For example, when you focus on total population and you see a husband, wife, and child, you would see three individuals even though they only count for one rental group, or household. Looking at a total population can be misleading and can artificially inflate your potential pool of renters.
An increase in the number of households in a market is a good indicator that there is also an increase in the demand for rental units. Conversely, a decrease in the number of households can tell you that the demand for rental units is or will be decreasing. We saw this during the great recession when adult children started living with their parents longer. The number households were not growing as fast as they had in the past or had even turned negative in some areas, but the population still increased.
One thing to focus on while reviewing household growth is the migration of people to a city or a state. For example, we are currently seeing a flight from density and a great migration from the north to the south. Many people are fleeing the density of city centers and are relocating to the suburbs where they are not in as close of quarters with their neighbors and have space not otherwise available. The great migration is evidenced by Florida overtaking New York as the third most populated state. People are fleeing the North East and Midwest in favor of the sunbelt, Texas, and Florida. Californian's are fleeing in favor of Nevada, Arizona, Washington, Oregon, Idaho, and Utah. Weather and taxes are two contributing factors to this great migration.
This metric is a little more difficult to find than the household growth and job growth. You may need to reach out to the building department in the city you are researching, or you may need to go to the city hall to look up the number of building permits issued. This is a great indicator of where a city is headed. If you see consistent growth in the number of permits for two or three years you are looking at an emerging market. Another thing to watch for is if the city starts to build faster than its absorption rate, that is how fast apartments are occupied when they are filled. If supply outpaces demand, then the market has become oversupplied and you may face rent reductions or concessions. Another thing to be mindful of is the asset classes. Many new A class apartments are loaded with amenities. If you have a B class property right next to a brand-new A class, you may lose renters to the shiny new building.
The most likely age for people to rent an apartment is in their 20s to 30s and over 55. Typically, people in their 30s to 40s have families and opt for homeownership when possible. Areas where the population tends to be unmarried and families are young and small usually have a higher percent of renters. The United States is becoming a renter nation helped along by college graduates saddled with ever increasing student debt as well as the increase in the contract or 1099 employee and the gig economy. Many young adults prefer to rent so they are not tied to a home, they like the luxury of being able to live where they want and have the amenities they otherwise could not afford in a house.
Knowing the ins and outs of the local government can greatly help you craft your business plan and select your market. There are some states and localities where it can take months to evict a non-paying tenant while others it can be done in a matter of weeks. As an operator you need to be able to remove a non-paying tenant as quickly as possible and turn the unit to be able to fill it with a qualified tenant. The tenant/landlord laws can be city specific too and this is important to know as you begin shopping for deals. For example, in Minnesota, Minneapolis and St. Paul have some of the most regressive tenant protection laws in the nation. These are specific to only those two cities and the rest of the state does not share the same mindset. The MSA has a population of about 3.28 million people and about 725,000 are in the cities of Minneapolis and St. Paul, the other 2.5 million live in the suburbs and exurbs around them. Far less than half of the population of the MSA is impacted by those regressive laws. Knowing this can help you make informed decisions when looking at and offering on properties. Strong Government Leadership When looking for a market it is helpful to know the local government is dedicated to attracting new business. Check and see if they have an employment or economic development authority. Look to see if they have a long-term planning commission or if they have a detailed written plan on where they would like to take the city. A city that has a plan is one you want to be investing in. Conclusion The United States is a large country with a huge variety of state and local laws and policies that impact multifamily real estate investment. It is impossible to become an expert in all areas, so we feel it is best to focus on one or two markets. Within those markets an investor should drill into the sub-market and locality level so they can become an expert in the market. Doing your homework and researching the area will let you know if it is an emerging market and a good place to invest or if it is struggling to survive and a market you want to avoid. Without doing your due diligence you are simply going on a gut feeling, and in real estate gut feelings are rarely a successful endeavor.