JOBS! JOBS! JOBS! And oh yeah, affordability
What is the realtor always telling you? "Location, location, location!" In residential, it is true. You want to be on that beautifully tree-lined street, near the best school, right down the road from Starbucks, and all the other establishments forming the path of progress. Most of this holds true in multifamily.
When I am doing the groundwork research of a market, I will literally thumbtack on a map where all the Starbucks are. Howard Schultz has a little more money and resources to do their research. They are not throwing darts at the map. I always check to see how the schools are in a market, but it really depends on your target tenant. Are you looking to offer on a building with 2- and 3-bedroom townhomes, that cater to families, or are you trying to provide workforce housing whether it be for blue-collar workers, or young professionals.
Last week I shared a map that had been making its way around the internet that really told the story of migration in America.
Those deep blue states are attracting population, while the dark orange states are doing their best to give people a polite shove out the door. Someone - I cannot remember who - said if the U.S. map was filled with sand, and you picked it up and tilted downward, all the sand would flow to the bottom, and that is what is happening with population trends in America. What is driving this? Is it "Location, location, location?" Southern California has the perfect climate, mountains, beaches, Starbucks on every corner, and the Kardashians. In multifamily investing, while location most certainly plays a role, the answer is “Jobs, Jobs, Jobs." I think I coined this, and if I didn't, I apologized to who did: "Where the jobs go, people flow." I should make a t-shirt. Cities in the south are financially incentivizing major corporations to pick up and move to their cities, and the employees - your tenants - are following them.
So pick any apartment in the south to invest in, and you are set. I wish it was that simple. You do have to get more granular in your research. If you cross-reference the migration map above, with the job growth list by state (below), provided by The Department of Numbers (the link at the end of this article), you will notice some correlating trends. Notice orange states (negative migration), Louisiana, New Mexico, and Alabama and find them on the D.O.N.’s list below.
While jobs are the most critical, you have to couple that job growth with affordability - otherwise, the numbers won’t work. You can look at a market like Seattle and see employers like Microsoft and Amazon, but Seattle has become so pricey, and therefore cap rates so low, that the numbers will not pencil. The two largest cities in America - Los Angeles and New York - rank highly on lists for projected job growth, but there is an affordability crisis that is pushing people out. And like Seattle, cap rates are just too low to make sense for investors. The 1% rule of thumb used in the single-family market, can help you size up affordability pretty quickly. It is getting more and more difficult, but you can find markets with a 3-bedroom home that sell for $100,000 and rent for $1000 – 1%. In LA, the median home price is $718,000 (and that includes the hood), and you would be hard-pressed to find a 3-bedroom home, that wasn't in a war-zone, renting for under $4000. That would be the .005% rule – not happening. Generally, in multifamily, with a value add strategy, we see cap rates of 3% in a market like Los Angeles and quickly turn the page.
Once you find the perfect balance of jobs and affordability, take a closer look at what sorts of jobs are in the market. Do they cater to your tenant? If you have a C class, workforce housing strategy, then an Amazon fulfillment center or Home Depot will suit your apartment nicely. If you are looking to take a B- class building with good bones up to a B+, then you'll be seeking higher-paying jobs in tech, health care, or banking.
It all seems like basic common sense, and it is. Yet there are still many who will chase a deal in Bum Fudge, Iowa - population 3968, with a Dairy Queen and a laundromat, only because it has a 10% cap rate.
Take note of where people are moving to. Check where all the U-Hauls are headed - this data is available. Find out how many jobs are flowing into the area. Who are the employers, and what types of jobs are they providing? Follow these metrics, and you should always have tenants lining up for an application. It never hurt to have a Starbucks down the street either.
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Department of Numbers: