10 Metrics For Finding Your Multifamily Market.
I often come across investors who are afraid to invest outside of their own backyard. Think for a moment how limiting this is. I, for instance, live in the greater Los Angeles area. I cannot possibly charge enough rent to cover the mortgage, taxes, insurance, expenses, and vacancy. One common rule of real estate is to make sure it cash flows. Cash flow is nonexistent in the US's coastal markets and even in many inland markets. Once you decide to invest outside your local area, the world is now your oyster. You can now frame your investment around critical parameters that will substantially increase your odds of succeeding. While it is exciting, I can also understand it is overwhelming.
A tidal wave of thoughts may come flooding in immediately. Should you consider a bustling city or a metro area? You could dive down every possible rabbit hole, cross-referencing "best real estate market" lists and trying to make sense of current population trends. You could even look up news local to your targeted areas.
Honestly, this won't help you draw any conclusions, plus you'll
waste a ton of time and energy. Instead, begin by assessing your personal investing goals. Maybe you want to invest in a growing market that also provides decent cash flow. The following research-checklist will help narrow things down:
1) Job Growth
2) Population Growth
3) Job Diversity
4) Landlord/Tenant Laws
6) Geographical Features
7) Cost of Living
8) Local News
9) Local Government
10) Whether You Have an Unfair Advantage
Since steady job growth is indicative of a healthy local economy, this is the most important metric to evaluate in each market. Job growth is a leading indicator of population growth. The more jobs, the more residents, the more likely the area will maintain a strong tenant base. The more people are attracted to a place, the more housing demand increases, which drives up rent and real estate prices.
Since the population in a specific area could be affected by natural disasters, migration patterns, and more, you always want to research it after job growth.
Finding an area with long-term upward population growth trends (not a temporary bump) is vital. A significant factor supporting that trend is job growth in the area. These two metrics provide a full picture of the health and future of a given market.
You want to find an area with a variety of industries supporting the local economy. Strong job growth is much less enticing if you discover that most of the area's jobs are, say, in the tourism industry. A recession or a negative news story could broadly impact tourist numbers and, therefore, job growth and population trends. A diversified job market is much more attractive since a hiccup in any single industry likely wouldn't affect the area as a whole. You want a pie chart evenly divided between health, tech, manufacturing, government, education, leisure, information, and Financial Services.
Beyond the top 3 factors - Job Growth, Population Growth, and Job Diversity, the next on the list are the laws governing rental properties. For example, Rent control is excellent for tenants but makes it incredibly challenging for landlords even to break even.
As an investor, you want some insight from local property managers who are intimately familiar with these laws so that you can find landlord-friendly areas. Or only look at the "red states."
While usually the last thing on investors' minds, taxes can significantly alter the bottom line. State income taxes and property taxes will both impact your operating budget thus, your overall return. Each state has a different tax structure. It's good to understand what you'd potentially be getting into so you won't be surprised later.
Use Google Maps to check out the actual physical landscape of the area. Look for physical barriers like a body of water, a mountain range, or any other geographical features that could inhibit the area's physical development. As an example, the ocean limits coastal cities. You can only migrate in one direction, which forces building upward or expanding into the suburbs. Be on the lookout for human-made features, such as train tracks, airports, and factories. Again, Google Maps and Google Earth are your friends.
Probably not what you want.
Cost of Living
By seeking out an area where the cost of living is low, especially compared to the area's median income, you're more likely to experience growth. If people can afford to live in the area, there is room for the cost of living (i.e., rent) to rise as more jobs and people move into the area. An easy rule of thumb to apply is the 1% rule. For instance, can you charge $1000 for your $100,000? It is broken down by unit in apartments, so if you paid $75k / door (purchase price ÷ # of units), you want to make sure you can charge $750. Honestly, I apply the 1.5% and above rule to be conservative.
You may want to track a few local news stories or check out the cities economic development site. When you can get out in front of the path of progress, good things usually happen. Our deal in Augusta, GA, coincided with the consolidation of all cybersecurity to Fort Gordon (in Augusta), resulting in a $2.6B annual impact on the community. It will indeed send ripples throughout the entire MSA.
I share a few tricks of my sleeve in this video.
Just as with the local news, the local government is indicative of the area's future standings. It's a good idea to invest in areas with strong local leaders who support new initiatives and an expanding local economy.
Strong leadership from the local government is attractive to corporations, which means that job growth will continue.
Whether You Have an Unfair Advantage
There's always the chance that you have greater insight into a specific area, more so than other investors. Maybe you have a close cousin or best friend who lives there; perhaps you went to college there or grew up there. Any time you possess an unfair advantage, you should take advantage! Local connections or a little history with a particular area can put you leaps and bounds ahead of other investors.
Part of the beauty of investing in Real Estate Syndications is the ability to leverage the operators and invest in any market you want. Once they let you know about potential deals, you can use these ten factors to conduct your due diligence in combination with your criteria and goals. You have no reason to be nervous about leaving your own backyard.