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Strategy Saturday
SS2: Choosing Target Markets When Investing in Multifamily Real Estate – 1 of 2
December 26, 2020
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Where you choose to invest makes all the difference when investing in real estate. Charles discusses how his team chooses target markets.

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Transcript:

Charles:
Welcome to Strategy Saturday, I’m Charles Carillo. And today we’re going to be discussing, choosing target market, when investing in multifamily real estate. Do this in a couple of different parts. The first being, finding markets, and the second will be finding neighborhoods. So first off we’re looking for landlord friendly States. That’s usually found in the Southeast, in the Midwest, in the mid South, avoiding the Northeast and the West coast, right? That’s really what you want to do. Main factors when multifamily investing, once we’re looking at a specific market, it’s going to be population growth, income growth, and job growth. So start off with population growth and usually the timeframes that we’re doing to look back and see what’s going on in this market, it’s usually 15 to 20 years, and that gives you an accurate idea of what that market’s doing and what you can expect in the future that market to do so.

Charles:
Over the last 15 to 20 years, population growth we’re looking for is 10% to 30%. So if you are in a city or looking at a city over 2 million people, we’re going to want to see a 10% growth in population during that time. If your city is over a million, but under 2 million, we’re looking for 15 to 20% growth in that city for cities under a half million, we’re looking for a 25% growth in population. And for cities under 250,000, we’re looking for a 30% growth in population on an ongoing basis. You want to see a population increase of 1%, to 2%. Smaller cities to have the larger increase. Okay. Now our next metric is medium household income. So again, over the last 15 to 20 years, we’re going to look at, you want to see a 30% median household income growth, okay. On an ongoing basis, you want to see an annual medium household income growth of 2%.

Charles:
All right. Now the rationale behind this is where there is employer growth. There will be hiring, there’ll be competition for skilled labor, to acquire skill labor salaries increase. Okay. On another note, when the salaries and jobs increase over time, the cost of living in that area will increase increasing rents and property values. A fantastic position, if you own multifamily real estate. Our next thing we’re gonna look at is going to be the poverty rate. A lot of people will pass over this. It’s something that I do look at though, as a team with our group and under 15%. So indicator of a thriving market, I have a partner of mine that will go up to 20%, but for our team, we want to see it under 15%. Our next metric is going to be medium house value. This is very important. You want to see medium home values over $80,000.

Charles:
Over the last 15 to 20 years, you want to see a 35 to 40% increase and medium house or condo value. On an ongoing basis, you want to see an annual increase in medium house or condo value of two to three. Now cap rates are not going to decrease if home prices are decreasing. Okay. Remember when cap rates decrease your property value increases. This metric is valid for single family rentals, as well as multi-family rentals. You might also utilize this for self storage and other commercial real estate classes. If homes go down in value, people will buy instead of rent. The market will not allow you to raise rents, if home values are stagnant or decreasing. We want vigorous markets. In these markets, you’re going to minimize tenant turnover. If homes continue to increase in value, which is what you want to do, because it’s harder for renters to become homeowners.

Charles:
Number one, profit killer and multifamily is turnover, right? If you can minimize that turnover, you are going to make more money on the property. Now, another metric we’re going to look at is crime. You want to see it continue decreasing crime over the past 15 or 10 to 15 years. Okay. Just like you want to see a continual increase in population when crime decreases cap rates decrease. Okay. And your property value increases. How does a city continually decrease crime? It’s usually through healthcare and education. In cities where they just lock up people, you’ll see that on their 15 to 20 year timeframe of crime, you will see that there’s little blips of where crime went down. And then a few years later, crime will go back up again and start up again. And that is because in those cities, what happens is that people I got locked up when they got let out nothing changed.

Charles:
So the thing is it’s healthcare education. A lot of cities with vigorous markets with a thriving industry are going to have and going to invest into healthcare and education. So it’s a great thing to look for. Now, next metric is jobs. You want to see annualized job growth of one and a half to 2% larger cities over a million people, closer to one and a half in smaller cities, closer to 2%. I don’t want to see one employer account for 15% of the tenant base and no industry account for more than 25% of the tenant base. Now be careful with what I just said, because when you’re looking at a market, you’re probably not looking at a property yet. Okay. You’re probably just looking at markets and targeting where you’re going. So you might look and find from a couple of websites that I give you later on, and you might say, wow, this is a very diverse job market.

Charles:
And there’s no industry over 10% or 12% or whatever it might be. Right. But when you’re looking at that property, when you’re looking at the property to purchase, and you’re looking through the leases, doing the lease audit, where you’re reviewing your tenants, that you’re ready to inherit where do they work? Are they going to fit in those metrics and make sure they do, if not, you’re going to have to make sure you’re going to have to realize that you might need to put more money in reserve because there might be an issue. Okay? You don’t want to have that. It’s very difficult to change your tenant base of where they’re working. So it’s easier to go in, in the area where there’s a lot of variety of industries and employers. So I hope you enjoyed everything we talked about for finding a market. A couple websites that you can use is City-Data.com and deptofnumbers.com. Those were a couple of websites you can use to find all these metrics in markets that you’re evaluating. I will put those links in all the show notes. And next week, we’re going to conclude on how to choose a target market by talking about choosing a target neighborhood. So thank you so much. And I’ll see you in the next episode.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar incorporated exclusively.

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