When selecting a multifamily deal to invest in, there are several levels of due diligence that competent investors do before selecting an apartment to purchase. First, we like to look at the market. There is power in focus, and the more you hone in on a specific market or couple of markets, the more you will identify viable opportunities.
Additionally, if you buy a nice property in a less-than-desirable market, there isn’t as much you can do to drive up the value through a properly executed business plan. In other words, we would rather be in a good market that has a halo effect on other properties; so we can get to our destination faster. Here are the characteristics we like to see when selecting a city/metropolitan area to invest in:
- Landlord-friendly legal infrastructure.
We tend to shy away from rent-controlled markets with eviction laws that are hostile towards landlords (NY, CA, etc..) because it creates friction in properly executing our business plan and presents an unwanted obstacle to us improving property values. As a professional landlord, it is a good idea to operate in a market with a landlord-friendly legal infrastructure. This means that the laws governing evictions and rent control should be favorable towards landlords. - Moderate to strong population growth.
Buying where people are moving and helps to ensure strong demand for your product. If you’re looking for a place to invest in real estate, consider cities with strong population growth. Buying where people are migrating to helps to ensure strong demand for your product. This is especially true in with rental properties, because there will always be a need for quality, affordable housing. - Exhibits strong historical rent growth.
Markets that show consistent rent growth are easier to forecast and make accurate projections for, and they present more opportunities to increase property values. Just a reminder, at a 5% cap rate, every $1 of NOI increases the property by $20. - Good median income with low unemployment.
This factor tends to work in tandem with population growth. Where there are jobs, there is a desire to move & migrate there. And there is a capacity to pay rent or handle higher increases in rent. We typically look at income demographics within a 1 and 3 mile radius around the property. One thing to consider is that $40k/year median income may be great in some markets and an absolute less than desirable area in others; so this is just one data point we like to look at & considering the cost of living.
As with population growth, job growth is another important factor to consider when evaluating a potential rental property. According to Berkadia economists, “At the close of 2022, the job markets showed remarkably strong resilience in the face of rate hikes, and that theme is poised to carry over into the [2023] New Year.” Areas with strong job growth tend to see an influx of new residents looking for housing, which can drive up rents and create more demand for rental units. When considering job growth, it’s important to look at the types of jobs that are being created in the area. In some markets, high-paying jobs may be driving up the cost of living, making it difficult for residents to afford rent. On the other hand, areas with lower-paying jobs may have a higher demand for affordable housing options. Either way, job growth is an important factor to consider when evaluating a potential apartments and rental property. - Economic diversity.
There are many factors to consider when deciding where to buy property. One important factor is economic diversity. When there is only one large employer or industry in a submarket, the area is less economically diverse and therefore more vulnerable to recessions or declines in that specific industry. On the other hand, an economically diverse area is more resilient to economic downturns because there are multiple industries present. Therefore, it’s important to consider economic diversity within a market, especially when evaluating different submarkets or tertiary markets for investment potential. - High home ownership costs relative to rents.
If it’s less expensive to buy than it is to rent, this creates a viable alternative to your product (rental housing) and can put downward pressure on demand for rental housing. The higher the median home value (and PITI mortgage payment) around your apartment, the better.
If you’re thinking about renting an apartment, it’s important to understand how local home prices compare to rents. In many markets, it’s actually cheaper to buy a home than it is to rent an apartment. Today, though with higher interest rates and housing shortage across the U.S., there is a strong demand for affordable, quality housing and higher rent growth correlates. Click here to review a Marcus & Millichap report, regarding the overall housing outlook for year 2023, and why multifamily apartments is becoming such a viable option for millenials. Click here also to review a five minute video from Marcus & Millichap regarding various property types, yet specifically why multifamily apartments is in demand.
These are the six overarching factors we like to consider when selecting a market to invest in. In the other articles, we will uncover the factors around the specific property attributes we select to review before making a decision whether to place an offer on a property or not. I hope you found this article insightful.
If you’re interested in learning your investing “status,” click here.
If you are interested in future investment opportunities, click here.
By Kelsie Mans-Ray
KMR Multifamily Acquisitions / Syndicator
NOTE: This information is of a general, educational nature and may not be construed as tax, financial, or legal advice pertaining to a specific offering, exemption or situation.
