Everyone, who has ever had the slightest interest in real estate, will have head of the saying, “Location, location, location”. Location is such an important factor when it comes to real estate investing, especially because it is one of the few things that you can’t easily change. The importance of location applies to multifamily real estate investing as much as it does to buying your own single family home.
Since we typically don’t live in the apartment communities that we purchase, we have got the luxury of selecting the best locations in the US within which to invest. There are a number of factors that we look for in a target market which ultimately support the rental rates that we can charge, as well as the vacancy levels that we can expect. We will explore our selection criteria for submarkets within an MSA in a later article. so for now so let’s dive in and take a look at some of the key factors that we look for at the MSA level.
We need people to live in our apartments so we look for a large and growing population. Some of the factors below will give insight into why the population would be growing. We also dive a little deeper into the population data to look for above average instances of single people, below 35 or people over the age of 65 since these groups have higher percentages of renters.
High unemployment / declining unemployment will result in more people moving to an area to look for jobs and it will also mean that people who rent will have the means by which to pay their rent – a key element in a successful multifamily business model!
Growing wages will allow renters to pay more, put simply increasing wages results in inflation and therefore higher rental rates. Higher average wages that come from higher paying jobs coming into an area, rather than just wage inflation from the existing jobs will also have a positive knock on effect. For example when Amazon decide on their location for HQ2, with thousands of highly paid software engineers we can expect to see significant job creation and wage increases in the industries that will serve that demographic.
Whilst all industries are cyclical, they are rarely all at the same stage in the cycle at the same time. By selecting areas that have employment diversity across multiple different companies and multiple different industries, we can ensure that there will always be adequate jobs for our renters. Understanding the industry breakdown of the jobs growth in an area can help investors better understand whether the the type of people that will rent their apartment s are coming
Basic economic theory informs us that when demand is greater than supply, prices will rise (and vacancies will decline). Specifically for multifamily investing we want to monitor how many apartment units are available in a certain area and how many permits have been filed to build new supply
Understanding rent as a % of household income, the cost of renting versus owning and also the rate of increase in median home prices can be key factors in understanding how many renters there will be. If house prices are high and increasing then more people will be likely to rent which is a positive demand factor for multifamily investors.
It is no accident that some of the most business friendly states in the US have some of the most desirable cities for real estate investing. Texas, Florida and North Carolina are all business friendly states and as a result have been able to attract more jobs and inhabitants than less business friendly states
Many of the criteria above are interlinked so it is important to explore all of them to understand the key drivers that impact the whole picture. Picking an MSA that scores well in all of the areas above won’t guarantee success but it will set you up for success. For more insights into successful multifamily investing subscribe to our monthly newsletter here.