Selecting a Multifamily Market In Under 10 Minutes

For today’s episode, we will be discussing markets. How do you identify good markets versus not-so-good markets?

We will go over starting with the end in mind, and understanding what your investing parameters are.

What we can do to understand and vet a market.

We will talk about these things…and more in another episode of Multifamily Investing Made Simple in under 10 minutes.

Tweetable Quotes:

“It's a simple supply-demand equation. If you're on the right side of the supply and demand, then it's hard to go wrong in this business.” – Anthony Vicino

"it doesn't do you any good to make two hundred thousand dollars a year in New York. If you're living expenses are one hundred and ninety-eight thousand, you're ostensibly poor." – Anthony Vicino

“where there are jobs, people will go and if jobs are disappearing, people will leave.  – Dan Krueger

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Transcript

Selecting a Multifamily Market In Under 10 Minutes

Dan Kreuger: [00:00:15] Welcome to Multifamily Investing Made Simple, the podcast where we take the complexity out of real estate investing to get started today, and this is one of our under 10-minute episodes where we take a topic or a concept in the multichannel investment space and simplify it in under 10 minutes so you can get back to doing whatever it is that you want to be doing. So today we're going to be talking about markets specifically. How do you identify good markets versus not-so-good markets? Anthony?

Anthony Vicino: [00:00:44] What do you? I just threw a dart at the map, honestly, and that seems to have worked pretty well for me. But if you are a little bit more seriously

Dan Kreuger: [00:00:52] With your dart and you have

Anthony Vicino: [00:00:53] Highlighted in Minneapolis, of all places, and it just so happened to be in my backyard. But, you know, in fairness, there's a very small amount of law now. The only map I have on the walls of Minneapolis. So but if you're more sophisticated than us and you want to have an analytical way of understanding and vetting a market, then these are some of the metrics and some ways that you're going to look at a potential MSA or metropolitan statistical area. So the very first one that we look for is population growth. It's a simple supply-demand equation. If you're on the right side of the supply and demand, then it's hard to go wrong in this business. And supply starts with population or rather a demand. I actually don't know. But if you have people moving into an area, it signifies that there is a demand that there are people that want to live there. And that is better than having people leave a city. People are leaving the city. Then you're going to end up with an oversupply of inventory and not enough people to rent it. So No. One, we're looking for population growth.

Dan Kreuger: [00:01:55] Yes, I think you said everything that needs to be said on population growth. It's very concise. Thank you. The next one on the list is going to be the job markets and specifically job growth or job decline. So how many jobs are available in the area? And is the number of those jobs increasing or decreasing? And really, I think this drives population because where there are jobs, people will go and if jobs are disappearing, people will leave. And so I think everything kind of starts with the macroeconomic picture in the job market. And that's really, I think, going to drive a lot of the movement of people around. You know, there are some tax and political issues that play into that as well, but largely from a high level. For example, if Amazon is going to build a big new facility somewhere with 7000 jobs coming online, that's going to do wonders for an area. So job growth is very important or decreasing numbers of jobs would be a not a good thing. So you always want to look at what the job growth looks like in an area.

Anthony Vicino: [00:02:54] And tying in with that Amazon example, it's really important to look at the economic diversity of the city itself. So if Amazon's coming in and they're bringing in twenty thousand jobs and that's the number one employer in an area, and that's it, well, then you have a lot of what would they call a keyman weakness. So if Amazon ever leaves that area, then you're in a lot of trouble. And this is what happened to Detroit. It was very locked into a single industry, the automotive industry when it went under. Then Detroit really got slammed hard. So we want to find is a city that has a good economic foundation, has multiple different businesses of different sectors, so that if any one of those sectors gets really hard, then it doesn't sink the city, you know. So like Las Vegas, it's a very hospitality tourism-driven city that got hit really hard during covid when nobody could leave the house and go travel anywhere. So that's another thing that we want to look for is to make sure that we have a good economic platform.

Dan Kreuger: [00:03:53] So just out of curiosity, what market has the most Fortune 500 companies per capita?

Anthony Vicino: [00:03:58] Well, that feels like it was a little bit of a leading question, but it is, in fact, Minneapolis.

Dan Kreuger: [00:04:04] Fun fact. All right. Moving on.

Anthony Vicino: [00:04:08] And what's interesting about that, by the way, is that those are a very broad spectrum of companies across many, many different industries. So just not just one industry. It's not automotive. It's not tech. It's everything.

Dan Kreuger: [00:04:22] Yeah. And before we leave this topic, we're going to do a little bit more self-promotion here real quick. That really explains why the Minneapolis St. Paul market did so well during the 2008 financial crisis. If you look at how the assets in this area performed during that period, they did great relative to other markets that were more strongly impacted by the economic downturn. And that's just a product of a diverse industry. So, anyway, moving on, another promotion for Minneapolis St. Paul, unemployment rate. So kind of the inverse of the job market metric that we were talking about before. You want to look at unemployment. So if those jobs coming online in the area, but unemployment is still high there, you know, that's something that you want to pay attention to and not just unemployment in and of itself, but unemployment relative to the rest of the U.S. because right now everyone's unemployment is kind of inflated. So if you want to get a good gauge of how a particular market is faring relative to the rest of the U.S., you want to look at how their unemployment compares to the national averages and other areas.

Anthony Vicino: [00:05:27] I think I read it somewhere that Minneapolis actually lost the least amount of jobs per the national average. But I don't want to keep going down to Minneapolis.

Dan Kreuger: [00:05:37] Just a big commercial for Minneapolis.

Anthony Vicino: [00:05:39] This has just turned into the Twin Cities is the Best Buy anyways. So, yeah, unemployment has sugar really into the job growth side of the equation. Next, we want to start talking about the quality of life. And one of the most important aspects of quality of life is median household income. How much is the average person making in a city? And this is a very important aspect because the more money somebody makes than ostensibly the more things that they can afford to purchase. Now, we need to offset that by understanding what is our median household price and the average cost of living so we can understand what's the affordability index of a market because it doesn't do you any good to make two hundred thousand dollars a year in New York. If you're living expenses are one hundred and ninety-eight thousand, you're ostensibly poor. So what we want to find is a good delta where there's a strong income correlated with an average cost of living so that your money goes further.

Dan Kreuger: [00:06:37] And that also comes in handy when you're looking at specific opportunities in an area. Take a look at that median income and taking a look at what the current rents are on properties he might be looking at and seeing if there is actually enough room to move the rents up to where you or the. You're talking to wants to move them, considering what the median income is in that area. So just another little tidbit there. But yeah, income really is going to be an important factor in things and to at this point income relative to other things like house price and cost of living and also looking at income in previous years and see how that income is changing over time. Is it increasing or decreasing or is it staying the same?

Anthony Vicino: [00:07:20] And in the same way, let's just put out their rent growth, really understanding have rental prices because we're multifamily people. We want to understand, are those rental prices actually increasing over time? Has it been a sharp increase in the last year? That could be a sign that maybe a lot of the inventory came online or a big new employer came into town. But we like to for us, we like nice, steady long term growth. We don't really enjoy seeing big spikes upwards or downwards. So those are some of the more objective things to look at. And then the last one I want to add on to here, it's pretty subjective. It's hard to measure, but I'll put it as just quality of life or culture of life and like, how happy are people to live in a certain place? Because some cities have a high prevalence of heart disease. They're very unfit cities. They don't have much cultural nightlife going on. There's not much interesting there. And so it's not a very enticing city for people to want to live in. Whereas, I don't know, someplace as the Twin Cities have consistently voted number one for like the best place to live aimlessly. I know. I just can't help it, but it's true. So anyway.

Dan Kreuger: [00:08:28] Yeah, so that might be as simple as looking at some of those, like periodicals like Life magazine or people whoever puts out Rick's List because

Anthony Vicino: [00:08:38] You're so old.

Dan Kreuger: [00:08:41] But there are all kinds of lists that these like magazines use. Yeah. A lot of I can figure out who puts them out, but there's a lot of those lists out there and it's not real estate oriented at all, but it might be a good clue to the kind of look at and they factor in a lot of stuff, you know, school districts and stuff like that. So very, very good info from like a macro level.

Anthony Vicino: [00:09:04] Mm-hmm. Absolutely. So that's pretty much everything that you need to know as a passive investor looking at different markets, if you go through these lists and you understand the population and job growth, the economic diversity, the unemployment rate, the median income compared to the household, household price and rent growth and quality of life if you understand all these things, you're going to have a hard time going along honestly and selecting the market. So get out there, find your market, and then find the operators that you want to work with and get to it. Start investing, go for it and we'll catch you guys next week.