How Can Passive Investors Know They’re Investing in a Strong Market?

It doesn’t matter if your multifamily deal is a five hour flight from where you’re located, it only matters that you are able to do due diligence on the market you plan to invest in. The problem faced by many passive investors is that they usually don’t have the time or expertise to investigate those markets.

I totally understand that dilemma, but I’ve found ways to gain information on the market, regardless of where it’s located. The bottom line is that you want to be sure you’re investing in a strong market.

Market Criteria: What Makes a Strong Market?

Before identifying the tools used to research an out-of-state market, I’d like to identify the criteria that define a strong real estate market. “Growth” is one of the keys, and it includes three types: population growth, job growth, and rent growth. You need to have all three on an upward trend to identify a market as “strong.”

Here’s why: if you have a lot of people moving into a market due to new job opportunities, but there is an abundance of multifamily properties, then rent growth will be stagnant and it would be hard to raise rents. That would limit your potential revenues and income, and the market wouldn’t be considered strong.

I mentioned that you want to invest in “landlord friendly” state, so let me explain. Many states have or are implementing rent control, which governs how much a landlord can legally increase rents at their properties. The last thing you want to happen is for someone to come in after you invest and place a cap on your ability to raise rents, regardless of the improvements made on the property.

Another problem comes into play when states limit a landlord’s ability to evict a tenant who doesn’t pay their rent. That could mean a lengthy and expensive legal battle in court to evict a non-paying tenant. Investing in states without rent control or laws that favor landlords over tenants are smart investments.

Another key criterion to look at is the potential appreciation of the property. That’s because the bulk of the profits on a multifamily property investment come when the property sells. I always search for markets where the property values are increasing, as the chance for an increase in value when the property sells is greater. Because real estate is cyclical, increasing values are no guarantee they’ll be increasing when the property is sold. However, it’s better to invest in a market where values are increasing than one where they’re not.

Tool #1 to Use: City-Data.com

One of the keys to investing in out-of-state markets is making sure that the market is viable. That means it has a low poverty level, a high household income level, rising employment, and a low crime rate. One of the best tools to use is www.city-data.com.

So what are good numbers? With regard to poverty levels, if a city has a population with greater than 20% living below the poverty level, it’s a city you want to avoid. As for household income, you want to invest in a city that has an average household income of $40,000 per year or greater. You should also look for low crime rates and low unemployment figures.

In addition to looking at employment and income, www.city-data.com also provides a good overview of the city itself. By entering a zip code, you’ll be able to pull up information on schools, restaurants, property tax assessments, and other key data, not only by city but by neighborhood as well. The website also provides information on crime rates, business data, housing data, and more.

Tool #2 to Use: Google.com

It’s not surprising to see Google listed as resource for use in multifamily property due diligence. It’s an excellent tool to look at population trends. Simply enter a city’s name along with “population,” and population trend information will appear.

You want to invest in cities where population is growing, not declining. I would not invest in a city where there’s been a population decline, because declining population means less demand for multifamily properties.

You have to remember that one of the driving forces for demand for multifamily properties is the aging population and baby boomers, which are selling their homes and moving into multifamily properties. They often move to states where their children are living, or move to warmer climates after retiring. That fuels the population growth that you want to see when searching for cities to invest in.

Tool #3 to Use: Additional Resources

If you really want to drill down into data on cities for potential investments, there are other tools available that offer some free data, and are quite reliable.

• www.IRR.com - IRR.com (Integra Realty Resources) is a leading company offering professional real estate reports that are of great value to investors. They also offer a wealth of research data for most major markets at no charge. All that is required is website registration.
• www.biggerpockets.com - This is a great resource for multifamily investors as it has a variety of links, articles, and data about real estate investing.

All of these resources, along with many others, can help provide the necessary data and information needed for due diligence on multifamily investments.

Summary

When investing money, passive investors want to ensure that they are investing in a strong market. With syndicators purchasing multifamily properties all across the country, it is especially important to understand how to evaluate a market regardless of where the property is located. The first step is to understand the criteria that help to define a strong market, including job growth, population growth, and rent growth. In addition, investors want to be sure they’re investing in property that’s located in a landlord-friendly state. There are many tools available to investors to help with the due diligence needed to properly vet an investment deal. They include free tools provided by companies like CityData.com, information available through Google.com, and professional reports you can find online. Nobody can guarantee a market will remain strong, but having the proper data available prior to investing money can ensure that the market is strong when the investment was made.

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