In this journey of commercial real estate investing, the value of an asset is dependent of its location. The state, the city, and the street the asset is located in makes a difference in its value because real estate isn’t just local but hyper local. When choosing markets for real estate investments, there are some questions to answer.
- Is this market landlord and business friendly?
- Does this market have job growth?
- Is there population growth?
- Does this market have income growth?
- Is the crime rate trending down?
Landlord Friendly States
Choosing a landlord friendly state is key to efficiently turnaround a multifamily asset. In a landlord friendly state, property tax values are relatively affordable. There are very minimal or no rent control, which in turn gives the ability to raise rents to cover higher expenses and produce higher returns for the investment. In a landlord friendly state, the process to evict bad tenants is painless and fast for landlords.
Another key factor when choosing a market to invest in is job growth. It is important that the number of jobs is consistently increasing and that there is a broad base of different industries in the market. If job growth is increasing then there will be steady population growth.
Ideally the job growth in the market should be outperforming the national average to make it better for the investment. People want to work and live near each other. In turn this creates a demand for housing which increases the value of all types of housing including multifamily real estate.
Another factor when it comes to population growth is to look at the ratio between renters and owners. If the submarket of a certain deal is above 40-45%, then that’s a good area for rental. On the contrary if the ratio between renters and owners is above 80-90%, this may not be good because there is too much competition.
Having income steadily increasing is a great sign of a strong market. It justifies having rents increase because the residents can afford it. For Class B and C multifamily, the average household income should be more than $36,000. Having the income higher than $40K is much better and will help the syndicator raise rents. Having an income of less than $36K will cause delinquency and affordability issues.
One-third of the monthly household income is typically is for rent. For example the monthly household income is $3,300. Affordability of rent would be $1,100. So when analyzing deals, one has an average rent of $1K, another is $1.2K and another is $700. The one at $700 has a lot more room to grow rents, which in turn provides an opportunity to increase the returns the most.
When investing in real estate, avoiding high crime rate areas is another key factor. In high crime rate areas, it will be difficult to increase rent and harder to change demographics. Lower crime rate areas help reduce the risk of the investment and will decrease unnecessary cost to maintain the property and it’s residents. Also lower crime rate areas will have a higher appreciation in property values compared to the high crime areas.
Here are some free tools to look through when analyzing different markets and real estate investments.
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