Now that you’ve decided that you want to invest in multifamily apartment complexes, you don’t want to just run out and buy the first apartment complex you find. You need to develop criteria on a city and Metropolitan Statistical Area (MSA). Below are the criteria that I develop when reviewing cities and MSAs.
The first factor that we look at is population growth. If people are leaving the city, then there is an increase in supply of properties. This increased competition amongst landlords makes it harder for landlords to increase rent. We also want to understand why people are going to that city or MSA. Is it because a certain company is moving headquarters? Is it due to economic development? Figuring out why the population is changing is the first step in analyzing a city/MSA.
Job Sector Diversity
We avoid investing in cities and MSAs that has a job sector that represents 25% or more of the workforce. The reason that we look for a diversified job sector is because if one sector faces an economic downturn, then there are other sectors that can maintain jobs. This diversified risk allows us to invest in real estate confidentiality.
Along with diversified job sectors, we also look for a number of large employers in a city or MSA. As a multifamily investor, we do not want to be dependent on only one employer dictating our market. If that one company packs up and leaves to a different city, begins to fail, or faces serious litigation, it can be detrimental to our business.
We analyze the US Census Bureau’s vacancy rates over the last 5 years are declining. This means that more jobs are being created and more money is coming into the city. More jobs, more money, more qualified tenants!
Supply & Demand
Vacancy can make or break the profitability of an investment. Unoccupied units and tenants not paying rent in a timely manner means our Net Operating Income is decreasing. This decrease in Net Operating Income causes the value of our investment to decrease. That is why we verify with the US Census Bureau that the vacancy rates over the last 5 years are decreasing.
We analyze that median rents are increasing over the past 5 years, per the US Census Bureau. Increasing rents means potential to increase rents by updating a unit now, and in the future causing profitability to increase.
Along with increasing rents, we verify that rent is affordable in a city/MSA. We verify that 25% of the average monthly gross income for a tenant is equal to the median rents. If the calculation is less than the 25% threshold, it shows that the rents are too expensive.
Other Considerations that we review after the majors have been considered above are the following:
City Recognition on being “Best Places to Live”
Landlord vs. Tenant Friendly
Business Development in the Area
This list can help you when you are reviewing and making deals in the future! I personally use these criteria and hope they are also helpful for you too!
Always feel free to message me if you have any questions about apartments or multifamily investing. I am happy to help!
Thanks again, and keep leveling up!