March 2021

Choosing a market – what to consider
Many of us, myself included, started out investing in our back yard. We know the area, we can do work there ourselves, and we can interview the tenant applicants. Then, with my properties the equity grew, I decided I need to get out of day-to-day management, and I sold them. I bought bigger properties, farther away and in better markets. Mostly better.

I wasn’t thinking about choosing markets with my first properties, and gave it only a little bit of thought after that, but learned quickly that some markets are going to stay down and out for generations to come. I needed a way to decide whether a market was good to invest in multifamily.

There is a lot material available on good criteria for choosing markets and a lot of high-priced research firms – Milken, CBRE, etc. – produce fantastic reports on good markets. All terrific, but I’m going to share my top criteria.

First, the most common criteria:

• Population growth: your market should be growing, otherwise you have an uphill battle competing for fewer renters. Do a Google search to find out trends over the last 5-10 years.
• Jobs growth: Jobs beget jobs. It is compounding. Good high-end jobs lead to 2-3 times that number of lower paying but solid jobs. Then companies make big moves into markets where their employees will have services that support quality of life. Use Bureau of Labor Statistics to find jobs growth.
• Crime: Check crime rates in the sub-market around your target property, not just the city’s crime rate. Use city-data.com, trulia.com, or neighborhoodscout.com.
• Median income and housing prices – use these to determine if the area is affordable and if there are enough people to pay the rent you need. Find that in city-data.com.

This only scratches the surface but you need to start with these data points.

Here are two more criteria that I consider among the most important:

• Property management – If your property is too small to support an on-site manager, how many local PMs are there to choose from? Do they manage other multifamily properties? How many properties, how many units? Do they have their own crew or contract out their work? I’ve had bad luck with PMs who have their own crew because where they see a problem, they send a crew to fix it and charge me, even when that’s not the right answer. They have to keep their crew busy. However, when the PM contracts out their projects, make-readies and renovations are way too often delayed.

  After we get the tenant’s notice to vacate the contractor schedules their time to come by and see the unit and bid the project, then tells us when they can start, which is too often days or weeks after the unit became empty. That’s brutal, waiting for the contractor, especially in busy times of year. Like now. Talk to the other owners and ask tough questions. If your market has no PM choices that you can be confident are good, your chance for success is low.

• Rent upside – first check out the rent growth for the city in general. You would see evidence of low or zero rent growth in the above statistics – population growth, jobs growth – but then you need to confirm this area of the city is seeing demand. Get rent comparables from multiple sources – Costar, Rentometer, Apartments.com, but be sure to do your own survey. Don’t just rely on published materials because it is based on incomplete information, and often dated. An ad on Apartments.com for a similar unit nearby might be a higher rent (good!) but they might have 20-30 units available immediately at that rent (not good). You need to come up with interview questions for your own rent survey. Know which nearby properties to call, ask them the rents for 2BR units, square footage, is it renovated, what amenities, etc. Do these surveys yourself at first, then find a virtual assistant to do them. I’ve always been someone who wanted to do the work myself, until I let go and realized others do this work frequently and are much better at it than me. It’s not just using my time more effectively, it’s accepting that many people have skills that I don’t have. If value-add is your strategy and rent increases are critical after you invest in renovations, confirm the market will return your investment with higher rents.