photo:
Getty
Making profitable real estate investments requires information and careful analysis. Before making any investment decisions, there are many critical questions you must ask yourself and at least five key metrics you need to review.
1. Population Growth Rate
Of all the metrics that predict future market volatility, population growth is probably the most important. The housing requirement — single-family homes versus apartments versus something else — will vary based on the components of population growth, but ultimately, more residents equals more demand.
The trick is that you don’t necessarily want to invest in a top-10 location for population growth, as that may only be the case for the short-term. What we care most about is steady population growth over the long-term — it’s one of the core tenets of our investment criteria at our firm. Average to above-average population growth is fine as long as it follows a positive trajectory that is expected to continue for the foreseeable future.
You can see how this plays out in multifamily pricing, new construction, rental rates, etc., with every major market. Where there are either rapid or gradual declines in population, there is also stagnant to negative-performing multifamily assets.
2. Employment Growth Rate
The largest driver of rental demand is population growth and, in turn, one of the largest drivers of population growth is employment growth. When analyzing a market, you want to understand its job creation trends. Ask yourself:
• Is it a steady jobs market?
• Does it fluctuate at a greater rate than the overall economy?
• Over what period of time has it been stable?
• If the employment growth rate is more volatile than the overall economy, what forces are driving that?
In general, the larger the market, the more stable the employment growth because there are many job creators, i.e., existing and new businesses.
Three factors to keep in mind are:
1. Healthcare, government and higher education jobs rarely relocate and tend to grow over time.
2. Military jobs can fluctuate based on base realignments and deployments. Be cautious of markets where military is the bulk of employment growth.
3. Manufacturing and virtual service jobs can be volatile regardless of the economy.
3. Components Of Employment Growth
In addition to the overall employment growth numbers, you must also study where jobs are being created. For instance, how stable is the job source? Be cautious of service and retail jobs. What types of jobs are they: white-collar educated jobs, blue-collar trades or minimum wage? What age group is the dominant employment growth attracting? For instance, the 18-34-year-old demographic is the largest group that rents.
4. Unemployment Rate
Looking at unemployment and components of unemployment is different than employment growth. While not typical, you could have a market with rising employment growth with no corresponding impact on unemployment. This occurs when job creation demographics are different than the current unemployed base.
In general, you should look for a market where unemployment is less than the overall U.S. market. If there is a steady trend there, then most likely this specific market will be comparatively better than those with unemployment rates greater than the U.S. average or volatile.
5. Landlord/Tenant Laws
Multifamily investments sit in the middle of several different local and federal policy influences:
• Federal equal housing laws.
• Federal, state and local business practices.
• State and local landlord/tenant laws.
Since shelter is a basic human need, there are several voices impacting how and in what way a multifamily property is operated. This can impact your tax bill, your allowable marketing practices, required property living standards and the landlord’s and tenants’ rights.
Evictions can and will happen, even in new A-grade complexes. The percentage of evictions and bad debt activity increases as you move down from Class A properties to Class D. You want to be in a state that provides favorable or, at the very least, neutral treatment for the landlord in eviction and bad debt scenarios.
In relatively neutral landlord/tenant states, evictions usually take 30 to 45 days, and if a tenant breaks a lease, they are responsible for the economic harm caused to the landlord. However, in some states, it can take up to six months for evictions, and during that time there is no rental income or no recourse to the lost rental income.
Analyzing a multifamily investment market can be complex. Reviewing key metrics can help you evaluate the potential profitability and risks. Long-term, steady population growth and stable employment growth are indicators of a promising investment market. Moreover, a market where unemployment is lower than the overall U.S. market is more favorable. Neutral landlord/tenant states may reduce the loss incurred from evictions or unforeseen circumstances. A thorough analysis of all of these factors can help you make informed decisions.