What Makes a Good Real Estate Market?

By Christopher Levarek

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.”

- Warren Buffet

In our last post, we discussed the top 16 markets to target in 2019 for multifamily or apartment investments. These were selected based on specific criteria or data demonstrating favorable signs towards investing in those markets. Although, every investor will have varying opinions on what makes a good market depending on goals, the following are topics to consider and note when selecting a market:

Unemployment

When looking at investing in a market, the unemployment rate should always be considered. Tenants will need to pay rent and thus will need a job to do so. Specifically, focus should be on finding markets with a lower than national average unemployment rate or decreasing or stagnant unemployment rate. Pass on markets with increasing unemployment rates.

Population

Consider population for market selection. Increasing population growth indicates a growing market which means more people interested or needing housing. Focus on markets with a growing population rate and avoid those with a stagnant or declining population trend.

Landlord/Business Friendly

Target markets in states or cities with landlord or business friendly regulations. This means that the city or state regulations simply lean in favor of businesses or landlords. Examples here are states with lower business fees or tax benefits or easier eviction processes when violations are discovered.

Rent Growth / Vacancy Rates

Another item to look at would be rent growth and vacancy rates which are usually in correlation with one another. If vacancy rates are decreasing, rent growth is usually on the steady or on the rise and vice versa. Target markets with an above the national average rent growth or 3% a year. Look for decreasing vacancy rates which will mean higher profitability and less expenses set aside for vacancies. Avoid markets with decreasing median rents and increasing or higher then average vacancy rates.

Job Diversity

Similar to having a diverse portfolio across multiple investment assets, you want to invest in markets that have tenants or customers working in a variety of jobs. This means that if a company declares bankruptcy, the tenant pool or customer base for rental properties does not get overly affected by a single company. Examples of these effects can be seen in real estate trends in Detroit, MI when GM and Chrysler declared bankruptcy or cities in North Dakota dependent on oil booms. Job diversity simply means spreading the risk of unemployment issues, affecting real estate, across multiple companies.

Affordability Gap

This item is one of the most important to look at when looking for a good market for investing in rental properties in general. The “affordability gap” is the difference between the amount an earner of the median household income of the city/area can pay for a home and the current median selling price of a home. Usually if the the median selling price of homes is three times the amount of the median household income or higher, individuals will choose to rent versus buy housing.

What does this mean? In cities or areas with a high affordability gap, there are more opportunities to provide quality affordable housing for tenants or renters. With a shortage on affordable housing across the United States, finding markets with an opportunity to provide a win-win for renters and landlords through affordable housing should be a major consideration for selection.

Miscellaneous Items

1. Population Age - Focus on targeting markets aligning with a population age corresponding to chosen property type, ie. assisted living(retired), luxury apartments(millenials), 3br/1ba (young family housing), etc.

2. Upcoming Construction - Focus on any cities with construction and large growth projects

3. Supply and Demand - Focus on markets with lower supply and higher demand in general. Ties to vacancy rates, rent growth and new building permits per year.

4. Cap rates - Focus on markets with favorable cap rates. Higher than national averages.

5. Price per Unit - Focus on markets with a below average price per unit/door ( Multifamily)

In Final

There are number of factors or pieces of data that go into selecting the right market. It is important to gather the right information to align with chosen goals or partner with a operator looking at these data points to further ensure success. Invest Smart!