Picking A Real Estate Market

 

So here we are in week three of our series Buying Your Own Apartment Building. If you missed them, you can read them here, Buying Your own Apartment Building and here What Niche Is Right For You?

This week we will be discussing how to pick a real estate market. There are a lot of things to consider when picking a market to invest in. Buying a multifamily property isn’t like buying stocks. If you get the stock wrong you sell it off. It’s a fairly quick process. If you get the multifamily property wrong it can drag on for quite some time.

Researching markets is a multi step process. First you will look at the macro indicators, if they look good you will move to the micro indicators. Understand that it is part science and part art. Start with the numbers, finish with the putting all the pieces to the puzzle together. Now let’s get started.

Macro Analysis

The first thing you need to do is pick a geographic area of the country. Do not fall into the trap of looking everywhere. For this series you are to focus on just one geographic area and at most two markets within that area. In general the country is broken down into 5 markets. The Northeast, The Southeast, The Northwest, The Southwest, and The Midwest. Within those markets are MSA’s.

There are 389 Metropolitan Statistical Areas (MSA) that the Office of Management and Budget has created in order to track economies, population, jobs, etc. They combine specific areas and compile numbers to give us a view of that area. Some ways of narrowing down where to start looking is:

1. First where do you live? Are you in a good market? If you are in a strong market it will save you a lot of time. My market is not a very good MF market. It is a great SFR market. So if I were looking to flip, or buy and hold SFR I wouldn’t have to go far. I already know the Macro and the Micro I would just need to confirm and prove what I already know. So I would be moving through the steps a bit quicker. Never over look your own backyard.

2. Do you have family and friends in other markets? Where did you go to school? Where did you grow up? How about the wife? Where do you vacation? Where would you go if you did vacation?

3. Is there an area of the country you can easily access. Right now most California investors are in AZ, ID, TX and NV where most northeast investors lean towards the southeast.

Picking a MSA

This is where the real work begins. Let’s start crunching some numbers. As you move through your investment journey you will start to develop your own criteria. So use this as a guide. Read as much as you can on picking a market and what criteria you should use. This article should only be one of many you build off of.

You have a product to sell, that product is a lease. To sell that product you need clients. Clients need jobs.

So where are the jobs? Where is the population growth?

Start with a few maps

IRS Follow the Money Map

Migration map from Atlas vans net very scientific but interesting

US Population Change Map

Another way of narrowing down an area is by the Top 10 list. Search for top 10 places to retire, top 10 places with greatest growth, top 10 places for jobs, you get the idea.

Now that you have an idea of where the people are going, lets see what the experts are saying. I use the following reports:

Marcus and Millichap multifamily forecast

Berkadia

IRR Viewpoint

Milken Institute Best Performing Cities

From there I start to look at sub markets and trends. Where is the job growth? What is the path of progress?

MSA Population

Population for the MSA should be north of 500K. Population growth should be in an upward trend and 1% or greater annually over the last 5 years.

Job Growth

Job growth, the higher the better but nothing less than 1% annually for 5 years.

Now that we have a MSA let’s look at market numbers.

MSA’s are large areas consisting of a few counties. Markets are more like cities or towns within those counties.

Micro Analysis

          Demographics

             Population

           Increasing annually over 5 years by 1% or more

           Bestplaces.net → People Stats

          Job Growth

          Increasing 1%, 2% is better with a strong future projection.

         BestPlaces.net → Economy

         Households

         How many families are there in your market as potential clients.

         Go to https://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml

                                Enter your market

                                Select housing menu on left

                                Selected housing characteristics

                                Scroll to housing tenure

        Per capitia Income

         Look for 20K or greater for this number. This is the income each person is                     making on average.

         Bestplaces.net→Economy

         Median Income

         A number around 35 – 40K is acceptable. The most important part here is to                make sure the annual rent when multiplied by 3 is LESS THAN this number. By          making sure housing cost are just a third of their income ensures they will be in          a better position to pay their rent. As an example my market demands 750 for a          2bdrm apt. 750 * 12 * 3 = 27000. So if my rent demands a median income of                27000 and the markets medium income is 32000 then I am in good shape. If              my rents are above the median income that’s not so good.

        Bestplaces.net→ Economy.

       % of population in You sweet spot

        Most of your clients will be 18 to 34 and then 55 to 65. The ones in between are            raising kids. You should look to see a number in the thirty’s here.                                   Bestplaces.net→ Population–→

      Job Diversity

      Your market should have a diverse job market, based upon industry. You do not          want more than 20% of jobs in any one industry. In 2008 all the car                                manufactures where in trouble and Detroit for all purposes disappeared. You                want your jobs spread out over multiple industries.

    Major employees

    List the top ten employers and the amount of employees they have. Do a web                search for Top 10 Employers in ______________.

    You can have job diversity but if half the population is working for one Employee        that’s not good. So multiple employers over multiple industries and none of them        control more than 20%.

    Vacancy Rate

    Less then 10% is the goal on this number.

    Best places.net→ Housing stats→ read The Rental Market In __________. 

             Enter your market

            Select housing menu on left

            Selected housing characteristics

Top of the sheet under Housing Occupancy

      Unemployment Rate

     With in 1% of the national average. If the economy is really hot I would trim that          to .5%

     Bestplaces.net → Economy

    % of Population renting

    The higher the percentage the more prospective clients you will have. Go to  https://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml

     Enter your market

     Select population menu on left (this should be the default)

     General population and housing characteristics

     Scroll to the bottom and find the line renter occupied housing units.

As you visit the census site and best places explore them by clicking on and looking at the different tables. There is a ton of information with in them. Take some time to explore and learn. You have to get a feel for what is going on in the market. Do not rush the process.

Schools, Crime, Weather, Flood Zones

You picked your area, you picked your MSA and you found a great city. Now where in that city do you want to be. If I were to ask you about your neighborhood the one you live in right now you may tell me the school district is great but stay away from ABC Elementary, they are the worst one around. You may say my neighborhood is safe but stay out of X, Y, and Z. Anything on the south side of town floods in heavy rains. So now you have to get to know your specific market.

Great Schools

Raids

Spot Crime

FEMA Flood Zones

The above will only give you an outline. You need to network with investors, brokers, bankers, and property mangers to start really getting a feel. Take a trip to your market and set appointments with these team members. Ride the area ask lots of questions. Stop and get out of the car. Talk to the mailman, the UPS driver, the local residents.

Look for things like How many dwellings have more than 5 units. How many permits were requested? How much construction is in the pipeline, how much has started, how much has just been completed. What are the major employers in / coming to / or expanding their present operations? Where are the bars, cafes, restaurants being started.

Additional Sources

City-Data

CBRE

Best Cities

National Multifamily Housing Council

There is a lot that goes into picking a market. Each market has it’s own nuances. You have to just jump in and TAKE ACTION. Things will start to happen for you. Always ask for referrals. So when talking to the locals ask, When I was growing up there was this lady on my block Mrs. Eldred. She knew everything about everyone. We called her the Mayor of the block. Who is the Mayor for this block? Or while talking to the bank, “ Who are the brokers consistently closing solid deals. They say everything can be broken down to 20% of the people get 80% of the work done. Who are the 20% of brokers/banker/property management etc. Every time you talk to someone ask them who they like and who they don’t. Knowing who to stay away from is more valuable than who to hire. Next week we will talk about making friends and building your team out so that you can start looking at deals.

Now go find your market!!