Charles concludes his 2-part series with guidelines for identifying good neighborhoods within your target market.
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Welcome to Strategy Saturday, I’m Charles Carrillo. And today I’m going to be discussing, choosing target markets when investing in multifamily real estate. This is part two of two. And the first part we talked about choosing target markets. And in this part, we’re going to talk about choosing neighborhoods within those target markets. Now, the importance of a neighborhood is that real estate is a super, super local business. So it’s very important to be aware of the neighborhood you’re looking at and also the surrounding neighborhoods as well. A lot of the same criteria that we’re using to choose a neighborhood is similar to what we chose used to choose a market. Median household income is one of those. It’s very important though, before we start what really differentiates one income level of a neighborhood from another neighborhood with a different income level. And it’s usually for physical things, and that can be roads, highways, train, tracks, and colleges.
These are the reasons why wealthy neighborhoods can be so close to poor neighborhoods. So our target median household income of the neighborhood is between 40,000 to $70,000. If you’re looking for neighborhoods with more appreciation, so properties go up in value, faster verse cashflow, you’re going to want to add $15,000 to $20,000. So you’re looking, going to be looking for a median household income of 60,000 to $90,000 of household income. Why is our target $40,000 to $70,000? It’s because it’s a mix of cashflow and appreciation. Once you start dipping below $40,000, your tenants cannot afford to live there for more than 18 to 24 months. These are high cap rate areas, but also high turnover areas. And remember, turnover is number one, profit killer in multifamily real estate. The next point we’re going to look at is neighborhood contract rents. That means one-year leases. The sweet spot for us is $650 to $1,100 per month.
And that gives us both a mix of cashflow and appreciation in the Southeast. We will go not, we won’t go below $700 in parts of the Midwest. We will go down to $650. Anything below $700 or $650 in your buying and a high cap rate area, high turnover neighborhood, and anything over a thousand dollars or $1,100 is going to typically be a low cap rate area and usually minimal cashflow. And as a side note here do not go lower than the $650. But if the numbers work for you to go over the $1,100 per month, that might work just fine for you. But for us, $650 to $1,100 is this is a sweet spot for cashflow and appreciation. The next point we’re looking at is neighborhoods unemployment rate. So unemployment is a very important and pre COVID 50% over 50% of Americans live paycheck to paycheck.
Two thirds of them have little or no savings. And that 50% we were just talking about are the ones, the people that we’re going to be renting to. So it’s very important that they stay employed. The neighborhoods unemployment rate should be no more than 2 to 3% higher than the city’s unemployment rate. You could go to 4%, but 3% is much safer neighborhoods with lower unemployment than the city’s average are better areas with higher income. Those are areas that we will not be investing into in neighborhoods that cashflow have nearly always a higher unemployment rate than the city’s average. So it’s important to know the neighborhoods unemployment rate for the neighborhoods poverty rate. It’s very similar to what we did when we were looking for a target market. We want to see that poverty rate under 15% and possibly you can go up a little bit more, but make sure that it’s always under 20%.
Now, the next thing we’re looking at, and this is something that you can look at using any type of Google maps, or if you’re driving the neighborhood is we want to see a lot of large established national tenants near the property, Starbucks target chain, grocery stores, chain restaurants. These, these businesses have done more research than you or I will ever do. And the amount of money that they’ve invested in the choosing areas that are going to be growth, but also that they’re going to have the customers that are going to come in and spend money to make that store profitable. It’s very important to be aware of these when you are choosing a neighborhood, some of the links that you can use for finding this data will be Citi hyphen data.com in department of numbers.com. I will put these links into the show notes. If you have ideas for another show topic for me, make sure to go to global investors, podcast.com and leave that comment. Also, please rate the show and I’ll look forward to seeing you next week on Strategy Saturday,
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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