Once you have decided where you want to invest in multifamily, it’s time to consider what kinds of properties you want to invest in within your local market. What indicators should you look for to determine how you will employ your multifamily business venture? Once you have analyzed some of these criteria, you will have a better picture of your multifamily investing prospects. You’ll also have a more specific idea of what kinds of properties you want to look for.
Investment Strategy: Consider what investment strategy works best for you and your situation. What kinds of properties? Do you want to find value-add or distressed properties? Will you instead look for a turnkey property to collect your profits and remain a passive investor? Knowing your strategy will help you focus your search and approach.
Occupancy Level: The number of occupied units at a property will determine what kind of financing you can qualify for. The lenders with the lowest rates are usually looking for 90% occupancy for 90 days.
Property Classes: Determine which property classes and neighborhoods you are most comfortable with. A-Class Properties generally offer the least amount of risk. I suggest getting the worst properties in the best neighborhoods, as there are always opportunities to increase the property. I do not recommend purchasing a bad property in a Class D neighborhood.
Number of Units: The more units you have, the greater resolution you will have on your vacancy expense. For instance, if you have 10 units with a single vacancy then that means you have a 10% vacancy, while that same unit in a 100 unit equals only 1% vacancy.
Age of Property: Older housing units come with possible hazards or increased maintenance expenses such as lead-based paints or aluminum wiring. Consider the age of a property and how much you’re willing to pay in additional expense for fixes and maintenance.
Market: This will likely be the first thing that you look at and decide on. For my team, we prefer to invest where we have actual boots on the ground, though this will be different according to each investor. To understand your market from where you are, there are a few types of people who can help. These people include property managers, brokers, other investors, residents, and online providers. All of these sources will have their specific approach and bias that you’ll need to account for, but they are valuable sources to help give you an idea of the market that you want to invest in.
Evaluating Your Market: How do you evaluate your market? If you are looking outside of your backyard, you can find a lot of information online about specific areas, for instance, on websites such as census.gov. Some important things to look at in your intended market are population age, job diversity, top employers and businesses, and supply and demand.
Unemployment: You can find the employment percentage for your market for the past three years using the census website. Preferably, you want to see a decreasing unemployment rate.
Population: To determine whether a market is growing or decreasing, find the city and MSA population data form and calculate the population change in your market. You want to see an increasing population, preferably between 1% and 3%.
Population Age: Obtain the Demographic and Housing Estimates form and calculate the population change for various age ranges for the last five years.
Job Diversity: It is best to be in a market that does not have one industry that drives more than 25% of the employed population.
Top Employers or Businesses: Find out who the top 10 employers are in your prospective market. You may want to avoid a market where a single company dominates the majority of jobs.
Supply and Demand: To ascertain the market’s supply and demand, you can find the vacancy rates and median rental rates from the last five years. You can also take a look at the year-on-year change in building permits made for commercial properties.
Looking at these criteria for your potential investment properties will not only help you understand your expectations for the market that you will be investing in but will also narrow down what kinds of properties and neighborhoods you will focus on as you get started.
As a Chief Inspiration Officer of DreamCatchers and founder of the Myers Development Group, I love helping people succeed in multifamily investing. Having built a multi-million dollar portfolio utilizing the proven Myers Methods, my mission is to share these real estate investing principles with aspiring investors to help educate them on how to start investing in multifamily real estate.