This article is part of our passive investors guide on real estate syndications, available here.
How to analyze multifamily investment opportunities
We’ve all heard the phrase “location, location, location” when looking for real estate deals. Ask anyone in the real estate industry, and they’ll tell you that location is very crucial to the success of an apartment community. That is because, even though you may be able to buy an apartment building on a low-cost basis, it doesn’t mean your property will succeed. You need to know how to perform proper multifamily market research.
The local market is the economy, and the real estate is like a shell; without the proper economic drivers, the real estate is just that of a shell. The market needs to have a pulse, and what gives it a pulse are things like population growth, income levels growth, and much more. That said, you don’t necessarily have to buy in only the strongest, most expensive markets, as these deals are tough to contract due to competition, and you’re buying growth rather than cash flow.
Finding a solid secondary or tertiary market primed for short and long-term growth but still, a true workforce tenant demographic with a strong property management company in that local area is the ideal market to buy in.
Multifamily Market Research:
The following are the 12 things we look for when evaluating a multifamily real estate market.
- Has a diversified job market from various industries
- Landlord friendly state
- Job growth of at least 1-2%
- The unemployment rate % can’t be more than 2 points above the national avg.
- The population has seen 20% growth since 2000
- The median income level has seen 30% growth since 2000
- Median income between $35,000-$75,000
- Median house value has seen 40% growth since 2000
- Crime below a 500 rating & has decreased in the last 10-15 years
- Poverty levels can’t be over 20%
- Population over 50,000
- Good Local school ratings
1.) Has a diversified job market from various industries
A diverse economy benefits multifamily communities because it means many different types of businesses and employers in the area. This attracts potential renters who work in various industries and creates a vibrancy and vitality in the community that people want to be part of. In addition, a diverse economy leads to more job growth, which is always suitable for multifamily properties since it could increase rental prices by increasing demand.
A town or city’s economy can become highly vulnerable if it concentrates significantly on one specific employer or sector. The more industries or employers there are, the less chance one of them goes bankrupt. When an automotive factory closes in Detroit, like General Motors at one point, unemployment rises, and the market takes a nosedive.
2.) Landlord friendly state
The state and the local municipality where you landlord very crucial to the success of your operations in the multifamily investing business. If you’re in a true blue state like California or New York, for example, landlording can be difficult. These states are more tenant-friendly and have very lenient eviction laws, where nonpaying residents can squat in an apartment unit without paying for almost a year before being evicted. Landlord-friendly regions are not just at the state level, local municipalities have their laws and regulations, so it’s essential to understand if your local submarket is landlord-friendly.
3.) Job growth at least 1-2%
Having a natural job growth of 1-2% year over year in a local market is healthy, it sustains income levels and further attracts more people.
A robust local economy is beneficial for multifamily communities because it usually means that there are plenty of jobs available in the area. This is an essential criterion for multifamily properties because there are more potential renters for current tenants, which can lead to increased revenue for managers and owners alike. Additionally, a robust local economy often translates into increased consumer spending, which is good news for businesses in the community.
4.) Unemployment rate % can't be more than 2 points above the national avg.
For example, if the national average is 4.7%, we don’t want to see more than a 6.7% unemployment rate in a submarket.
A low unemployment rate means more people are being employed, which means there are more people in the workforce earning money to pay for things like monthly rent payments. A low unemployment rate also indicates how many new jobs are being created in the area because if no one is coming into the city, how could they possibly be filling these positions?
This job growth is significant in multifamily properties that offer retail or commercial services on their ground floor, like cafes, restaurants, shops, etc., because it will attract even more renters who can spend their disposable income in these businesses and make them successful as well. It’s a win-win situation when job growth and increased business opportunities occur simultaneously.
5.) Population has seen 20% growth since 2000
Population growth is significant; as migration and more people populate a given area, it naturally increases unit demand and rental pricing.
More people living in an area increases how much money is spent on local businesses. Since there’s an increased spending potential, it’s usually good news for multifamily properties because commercial rents will be higher due to the increased demand. A growing population shows how strong a community is because it shows that people are attracted to the area and want to move there. This is important for multifamily communities because it means they’ll have a steady stream of new renters, leading to increased revenue and a higher occupancy rate.
Additionally, when a population is growing, it usually means that the local economy is doing well, which is good news for commercial and multifamily properties alike.
6.) Median income level has seen 30% growth since 2000
Seeing a solid growth percentage in median income levels tells apartment owners that the tenant base in the local market is growing at a healthy pace and can afford to keep up with rent trends. This income growth indicates a healthy trend. Every market is different, and every landlord or property manager qualifies prospective tenants at a different median income threshold.
But generally, a property manager would like to follow the three times rent rule, which means if the asking rent is $1,000, the property manager wants to see that the prospective tenant earns three times that each month or $3,000 ($1,000 rent x 3 = $3,000). This means that the prospective tenant can comfortably afford to pay rent each month and would qualify them to move past this item of qualification.
7.) Median income between $35,000-$75,000
Median income levels are essential in understanding the affordability of a said multifamily submarket. The sweet spot is $35k-$75k because income levels below $35k are getting closer to the poverty line, and incomes above $75k have a higher income and may elect for homeownership.
8.) Median house value has seen 40% growth since 2000
This type of value growth in single-family housing indicates a strong trajectory for real estate values overall.
9.) Crime below 500 rating & has decreased in the last 10-15 years
Just like good school ratings, a low crime rate is an attractive quality for multifamily communities because it provides a sense of safety and security for potential and current tenants. Families with children will be more likely to rent in an area with a low crime rate, giving the property manager the opportunity to charge more for rent. This increased demand will also escalate sale prices down the line as many investors factor this into their decision-making process.
Sites like city-data.com allow you to zoom into a zip code and analyze crime over the past decade. We use this site and look to see ratings below the 500 mark, and preferably trending down.
10.) Poverty levels can't be over 20%
When a zip code has more than 20% of the population below the poverty line, this causes concern for the area’s demographics and how that will affect things like rent collections and affordability.
11.) Population over 50,000
It’s a solid sign to see a population size above 50k, although you can still find strong markets below that.
12.) Good Local school ratings
The local schools in the vicinity of an apartment community contribute to the overall execution of operations. Good local school ratings mean prospective tenants will pay more to be close to nearby quality schools. Also, attracting better-quality residents with children or a family will reduce turnover as tenants will likely want to be close to these schools for the duration of the child’s tenure there.
An excellent public school system is an essential multifamily property criterion because it means you won’t have to pay out-of-pocket for education costs if your child decides to attend local schools. In addition, if the schools are considered ‘good,’ their graduation rates will likely be higher, resulting in more potential renters from each graduating class.
This also increases revenue for commercial properties since there’s a better chance that young people will want to move into the area and live close to where they work.
Frequently Asked Questions About Multifamily Market Criteria
A property is considered a multifamily investment property when the structure has five or more units. “Multi” refers to multiple, as this one dwelling has several units for various people to live in and call home.
A healthy economy, stable population growth rates, low unemployment rates, and a robust local job market are good indicators of an excellent multifamily market. In addition to those factors, a sizable amount of renters makes for a tremendous multifamily market, as more people needing housing equals more renters looking to purchase. The best markets have high occupancies and high rent per unit set point.
A multi-family residential property typically has three key attributes: location, quality of the buildings, and a positive cash flow. The real estate term for a multi-family residential property is “multi-unit.” In this instance, “multi” means more than one, and “unit” refers to properties with five or more housing units. Although they’re often called apartment complexes, they usually consist of commercially zoned parts that produce income from retail stores on the ground floors or parking lots used for extra income by renting them to commercial businesses. The leases are usually set up so the landlord pays all the operating expenses of these common areas and is responsible for any structural repairs outside of individual tenants’ units.
Multifamily Market Research - Conclusion
There are other criteria to be aware of when analyzing a multifamily market that we didn’t list here today, such as what the proximity is to major highways and local amenities, supply and demand of existing units as well as new units that are set to come online in the next 1-3 years and much more.
Analysis of a market for operating multifamily investments is a bit different than evaluating a market for a potential fix-and-flip project. But starting by monitoring these 12 items takes the blinders off your market analysis and allows you, the multifamily investor, to make a decision with the next few decades in mind. Real Estate Investing in a market with solid fundamentals will give an investor a strong trajectory of growing net operating income (NOI).
Get to know the local markets’ capitalization rates (CAP) to understand how values are formulated there. When it comes to multifamily real estate investments, before you start crunching the numbers on the next multifamily property that comes across your desk, make analyzing the market your first priority.
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