As we have discussed in other articles selecting the right market to invest in is critical to your success as a multifamily apartment investor. You have heard it before; “Location, Location, Location!” This advice states the importance of investing in the right location; it’s sound advice. A good market can help protect against mistakes made in investing just in the same way a bad market selection can leave you trying to run uphill into a headwind just to see some success.
Below we have lined out a lengthy list of considerations you should take when selecting a market to invest in. One of the benefits of doing this work upfront will be that you will already know the deals that you review are pre-qualified based on the market.
Demographics:
Population
The total population for the metropolitan statistical area (MSA) is a quick number that can give you a high-level indicator of the potential demand in your market. Ideally markets with over 100,000 people tend to be more stable. If the market meets this minimum there is good chance that there is a good supply of apartment complexes that you could potentially acquire and that you will be able to find individuals that want to rent those apartments. In smaller markets there tends to be less apartment complexes, lower population density and or more individuals that own their own home.
Population growth
It is ideal to invest in a market where the population is increasing. This trend speaks well for several things in the current market but also the future demand for apartment rentals in the future. A market with decreasing population may be a sign that you could face issues in having a large enough tenant pool to fill your rentals in the market or may face a softening in rents as the area becomes less desirable. An important consideration here is the cause of the population growth; you should ensure that the population growth comes from a sustainable source.
Population Age
The population age (i.e. the breakdown of age ranges in the population) will inform you of the potential type of apartments that will be in demand currently. As real estate is a long-term investment where you will hold property (some times more than a decade) this information can provide an indicator of where the market will be in the future as well.
Macro-Economy:
Employers
Towns where everyone is employed by one major employer (ex. military towns) can create a concentration risk if that employer were to move or go out of business. It is important that you check that there are a significant number of employers in the market. Further you should consider the quality of the companies that are in the market. A good way to evaluate the quality of employers is to identify the top 10+ employers and see if they are reputable companies. If there are a lot of Fortune 500 companies in your list that is a good sign of the stability of your market.
Job Diversity
While it is good to have multiple employers as a mean of diversity, it is as equally important to have diversity in job industry. It is a standard benchmark that there should be no one employer or industry employing more than 25% of the population. Diversity in industry allows a market to be able to sustain itself if a specific industry (i.e. oil sector) is hit hard.
Job Growth
People follow jobs and people with jobs can pay rent. As with population growth you should understand what is driving the job growth. Is there some one-time event or project that has created a rapid expansion in jobs that will terminate at a set time in the future? If so then the job growth you are seeing is not sustainable. Job growth is a pre-cursor to income growth and income growth is a pre-cursor to rent growth. You should key into what is happening with the job market and this could serve you well in the long-term outlook for your investments.
Unemployment Trends
As with job growth you want to look at unemployment. An increasing unemployment rate sends the opposite message of job growth. It is likely that you will face a market with tenants that can not pay or will have a hard time finding qualified tenants. You should also pay attention to the unemployment trend as well compared to the overall US. If the unemployment is significantly higher than the national average, then you may face even more difficulty if a recession were to hit the economy. It would be helpful to look at how the market was impacted by past recessions as this can provide insight into what may happen in future recessions.
It would be helpful to look at how the market was impacted by past recessions as this can provide insight into what may happen in future recessions.
Median and Average Income
The median income is important as it is directly related to the type of tenant you will have and their capacity to afford future rent increases. The trends for income growth should also be reviewed as this will be an indicator of where your potential rents will be in the future. Typically, you want your rents to only be 30% of the resident’s income, this should leave you with a comfortable margin to find qualified renters.
Planned Future Projects
Future projects let you know how invested the local government and business community is in the market. This may come in the form of building a new sporting arena, park, airport or other type of development. These types of projects help to create jobs and show that the outlook for the market is positive.
When qualifying a market for real estate investment, the metrics for demographics and macro economy of a market are:
Demographics:
Population
Population growth
Population Age
Macro-Economy:
Employers
Job Diversity
Job Growth
Unemployment Trends
Median and Average Income
Planned Future Projects
These are only a few of the metrics you should look at in the demographics and macro economy of a market. In the next article we go through the remaining considerations you should have when evaluating a market to invest in.
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.