How To Find The Best Market To Invest In
A good many of us got into real estate investing buying single family homes, to flip, fix up, or to rent. The thing that quickly becomes obvious in this market is single family houses are valued using comparable properties; similar properties in the same neighborhood that have sold in the last six months.
So if you are going to succeed in any way using single family as your vehicle you have to pick a particular part of one town and become an expert in values for that area.
It’s location specific. The town you live in is the town you have to buy in.
Not so with multi-family.
Apartments are not valued by comparable properties, but by the income they produce, so there is no need to restrict yourself to a local market just so you can be on top of local values.
Apartments also allow you to achieve economies of scale, lower expenses per unit, so above 20 units or so it becomes financially feasible to have the property run by professional management.
There are high quality professional managers all over the country (IREM), so as you can see, when you choose apartments as your investment vehicle you are free invest in the market that will produce the most profitable deals for you, wherever it may be, not just the one you happen to live in.
Best Market To Invest In
So if you are free to invest anywhere in the country, where should you buy?
Markets vary from state to state, county to county, depending on what is happening there.
Some markets are volatile, rising to high levels of annual appreciation, then crashing, while others are more steady, never appreciating too much, never falling too low..
What is the best market to invest in?
It depends on your goals?
“Best” will be defined by your goals. What is you are trying to achieve through buying apartments is going to dertermine the market you invest in.
- Are you looking for steady cashflow, month in, month out, for the rest of your life?
- Do you want to amass $10M in cash over the next five years?
- Do you want to create safe, clean, housing in poor neighborhoods, while being highly profitable?
There’s an ideal market for each of these scenarios. You just have to know what you are looking for and search it out.
If you are after steady cashflow then markets in the Midwest, like Des Moines, Iowa, Indianapolis, or in the South, like Nashville, TN, or Houston, TX would be good markets to look at.
If you are looking for rapid growth where you can build huge equities fast, markets like Las Vegas, NV, Los Angeles, CA, and Phoenix, AZ, Tampa, FL would fit the bill.
If your goal is more socially oriented and more about creating a higher standard of living for the working poor while still providing healthy rates of return, just about any major Metropolitan area provides a wealth of opportunities.
Different Market Types
Each market has a few things driving the demand for housing in the area, and the stability of the market often comes down to the stability of the forces driving the demand for housing.
For example, college towns. In Bloomington, Indiana, Indiana university accounts for close to half of the population. The permanent population is about 35,000. During the semester the student population swells that number to about 65,000.
Demand for student housing will always be there, but it’s management intense, and falls off during Spring Break, Summer, and Christmas.
In other cities employment is the main factor driving demand for housing. Houston, Texas, for example, is an employment hub for the energy sector and has seen steady employment growth for about ten years now. With the recent spike in oil prices, and energy companies sucking money out other sectors as people pay record high gas prices, employment growth in Houston, and the demand for housing there, won’t be slowing down any time soon.
Another factor affecting demand for housing is immigration. Border cities like San Diego, Los Angeles have a steady influx of immigrants coming in from Mexico, but also Asia, and the rest of the world for that matter. Because of where these cities are, the warm climate, the desire of people to move there from where they are pretty well assures the population from immigration will continue for years to come.
One more factor to look at to determine rental demand is income growth. This goes hand in hand with employment growth, but fills out the picture a little more as it is somewhat of a lagging indicator. It basically tells you a local economy is settling in for a period of growth as employers feel confident paying their employees more money. Also, by definition, it means there is a short supply of the skills being paid for at the moment and plenty of demand for more jobs at the income levels experiencing that rate of growth.
For apartment investors income growth is a good sign as it qualifies the positive indicators of population growth and employment growth. (i.e. population growth is not a good thing if new jobs are not being created, employment growth is not so good if the jobs are all in a single category)
There are other factors that drive demand, and most of the time a combination of the three above are at play as well. The point is to research the city you are interested in to find out what they are, and determine if those factors are likely to continue.
What you are trying to avoid is investing in a market that is in decline.
In the oil business there is a state called “peak oil”. It applies to an individual oil field or the oil supply of an entire country. It is essentially the point in time when the maximum rate of extraction has been reached. After that point, the rate of extraction declines and it takes more and more effort and expense to extract ever diminishing quantities of oil.
Well, so too with apartment markets.
If you invest in a market that is in decline, there is very little you can do to make your investment successful. Demand for housing is decreasing, vacancies are increasing and your property “will” go down in value. No amount of work on your part is going to change that.
Conversely, when you invest in rising markets, you have the force of the economy pushing you upwards, like an updraft on a glider. You don’t have to be that smart, you don’t have to work that hard, you can even make mistakes. The rising demand for housing means a steady and increasing flow of tenants coming to you, making it easy to keep your properties full and raise rents. Of course you want to work hard (when it’s called for), and you want to do the best deals possible at all times, but investing in markets that are riding a wave of appreciation makes it much more likely you will be profitable and make a boatload of money.
Market cycles are pretty simple to understand and there is no need to make it complicated. Markets are either going up, or they are going down.
When the market is going up it is a seller’s market because values are going up due to increasing demand for housing, making it easier to sell than to buy.
When the market is going down it is a buyer’s market because values are going down due to decreasing demand for housing, making it easier to buy than to sell.
Most major metropolitan areas go through 5-10 year seller’s markets and 3-5 year buyer’s markets. Click on the link and take a look at this graph of the Los Angeles market.
(These graphs are drawn from housing sales data, but what they represent are the forces of demand mentioned above; population growth, job growth, income growth.)
Notice the down cycle spans about 5 years, then the up cycle lasts another 10 years. The current down cycle (for L.A.) will probably last around 10 years due to the severity of the current recession and the shere masses of properties that have gone back to banks.
When To Buy
If you are a real estate developer, or a rehabber, or anything that requires you to “sell” property in order to profit, then you live and die by market cycles.
If you are an apartment entrepreneur though, market cycles simply mean a different type of buying opportunity. There is never actually a bad time to buy apartments.
You see, in a down market there is still demand for rental units due to people moving back into apartments after losing their houses to foreclosure, and general belt tightening that results in the decision to rent vs buy. As long as people aren’t migrating away from the city you will always be able to fill your units.
When the economy recovers and income starts to grow again, then you will be able to raise rents and see some appreciation in your property.
So if your goal is to create a strong cashflow that will grow steadily over time, you may not have to look any further than your own local market. If the structural economy of the town/city you live in is sound (meaning industry is diversified), there are always opportunities for class C apartment properties with value plays that you can turn around and then manage effectively for maximum net cashflow.
On the other hand, if your goals are to create a a net worth of $30M in 10 years, you are only going to achieve that in a market that experiences rapid appreciation in an up cycle. Markets like L.A., Las Vegas, Tampa. In this case your strategy would be to buy class B and class A properties with value plays in these markets during a downturn, execute the value plays, manage the properties for cashflow until the economy recovers, then ride the appreciation all the way to the top of the market.
Tools To Help You Make Good Choices
The key to making good decisions is having good information. This is actually a very important thing to remember. If you listen to real estate brokers, attorneys, accountants, other investors, “gurus”, or anyone else who has an opinion about “the market”, and then you act on what they say, the result will be a very painful experience.
The only way to way to make good decisions is to have good information on hand to make them with.
Fortunately there are tools to help you with this:
Site Reports: Sitereports gives you information about demographics, which includes what you want to know about population, employment, and income growth. It’s a paid service, but offers a great many features.
Loopnet.com: Besides listing apartments and commercial property Loopnet also provides a lot of demographic information. This is available through their free account.
Housing Alerts: This would have to be my favorite real estate tool of all time. Housing Alerts takes existing home sale information provided by the government for each MSA (Metropolitan Statistical Area) in the US and plots it on a graph for you. Features include moving averages, market comparisons, and more. This is the tool that tells you when a market has peaked, and when it has bottomed out. Nice information to know.
If the mention of $30M in 10 years (above) rang some bells for you, this is the tool that gets you there. It is a paid service, but worth every penny. Highly recommended.
Take a bit of time and think about what’s important to you, then formulate the apartment investing goals that support you.
WARNING! Don’t automatically assume ammassing a huge net worth is the right plan for you. Building a big portfolio means having a sizeable team of people working for you. If you are not comfortable managing and leading people, you will be miserable pursuing this goal. I guarantee it! Be honest with yourself. What do you want? Buy the apartment property(s) that will serve that goal.
Use the tools above to check out your own local market. If you can achieve financial freedom buying one or two apartment properties in your own local market, that is by far the best choice. Also check out high appreciating markets if your goals are ambitious.