Investing in multifamily real estate is becoming increasingly popular. It can set you up for generational wealth. Choosing the right market will help you accelerate the process.
So where to begin? I think the best way to determine which market to invest in is to start with the macro picture. By zooming out you can see which areas have job growth, population growth, and wage growth.
You are investing in real estate that provides shelter for people. If there is more people that have more money and access to opportunities, the better off your chances for success.
The Big Picture
The fundmantals of multifamily real estate investing are not terribly complicated. You have people or tenants that pay you to live in your property.
They also pay for amenities such as parking, pets, laundry, etc. The rents and other income you collect is the top line revenue.
Then you have expenses to operate the property like maintenance, staff, taxes, insurance, utilities, etc.
The income the property produces minus the operating expenses is called Net Operating Income or NOI. It is important to be able to collect more income in order to increase your NOI.
Job, population, and wage growth support this.
Job Growth
Are more jobs coming into your target market or leaving? If jobs are disappearing in a market, the population is likely to go with it. This means less customers for you.
Vacancy in your investment property will increase which means your NOI will will decrease. Not only will physical vacancy have a better chance of increasing but also economic vacancy.
Economic vacancy is when a tenant is physically occupying a unit but not paying rent. If jobs are being lost this could be a potential problem at the property.
There are several ways you can look up job growth in a market:
- Bureau of Labor Statistics (BLS): https://www.bls.gov
- Local Chamber of Commerce
- Local Newspapers
- Local Economic Development Boards
- Sites like Monster.com or Indeed.com
Population Growth
When population is moving into an area it drives demand for housing. Pretty simple. If there is not enough housing supply for the growing population, the amount you can charge for a rent goes up.
This is due to high occupancy. If you are 100% occupied then you are likely not charging enough rent.
Conversely, if population is leaving a market, occupancy will decrease and you will be left competing with other properties. You might have to lower rent in order to attract a tenant because they now have more options.
To find population data you can look up census data: https://data.census.gov or you can just Google population + city name + state.
You can get the trend line of population and extrapolate growth over whatever period you need.
Wage Growth
Wage growth or income growth protects rents from falling. If median household income is going up in your market, rents have a better chance of going up with it.
The metric often used by investors is median household income. Median household income means half the population earns less than that number and half the population earns more than that.
It is a good indicator for how much rent a household can afford. You can apply 3 to 4 times rent for median household income on average for how much you can charge.
Markets move slow so it is important to look at the trend line over a period of time like 10 years.
You can look this data up on http://www.city-data.com and type in your city + state. Scroll down a little and it will show you median household income.
Real Estate is Local
After you choose which market you want to invest in you need to figure out which submarket to invest in. This can take some time to get to know certain areas of your market depending on how big it is.
Each submarket has unique characteristics and some can vary block to block. A bad location can cause a lot of real estate headaches whereas a good location can seem like you are on autopilot.
Crime
When doing research in a local market it is good to figure out the crime rate. Crime on a property can cause undo stress and make it difficult to get financing in some cases.
You can look up crime on the same website for looking up median household income at http://www.city-data.com by looking up city + state and scrolling down further.
Also make sure to Google a potential investment property + crime or your the property + shooting to see if there have been any recent bad crimes.
Visibility
How much traffic does the subject property get? Is the location convenient to get on and off the highway?
Having more visibility on the property will make it easier to drive foot traffic to the leasing office. People will drive by it and check it out if they are looking for a new place to live.
A property off the main strip might be considered a flagpole lot where you might need a flag in order to see it from a distance.
This is becoming less important in multifamily as online marketing becomes better but it is still something worth considering.
Demographics
Demographics refer to characteristics of a population. This includes age, income, education level, and household size.
This is a really important part of investing in real estate. Knowing the demographics of makeup of a population within a 3 to 5 mile radius will give you an idea of what kind of tenant you can attract.
If there are a lot of young professionals in the area they will be looking for smaller 1 bedroom or 2 bedroom units. If there are a lot of families in the area they will want larger units.
How much income prospective tenants make is important as well. The demographics can give you an idea if an area is growing or dying.
You can get this data from several different sources:
- Census Data: https://data.census.gov
- City-Data: http://www.city-data.com
- Zillow: https://www.zillow.com
- Local City Websites
- Neighborhood Scout: https://www.neighborhoodscout.com
Conclusion
Markets that support the type of property investing you plan on doing is key. Landlord friendly states with strong demographics improve your chances of success.
See which areas are growing in population, jobs, and income. Then find out which areas in that market are really thriving. Choosing a good location makes your life easier and your return on investment greater.
