By now we are all probably tired and bored of hearing the old real estate adage of "location, location, location”, but truth is, it can’t be said enough.
Perhaps, for multifamily investing, a better consideration would be “sub-market, sub-market, sub-market,” where the location is actually a subfactor of what makes a good market.
To break it down into subfactors or subcomponents of the general idea of a good market, there are several things every investor needs to consider. Some of these may be very obvious and relatively easy to discover while others will require the skills and expertise of a real estate professional.
Considerable research, a clear understanding of the dynamics and potential of the market, as well as other factors will always be critical considerations in multifamily investing which are not always easy to foresee.
There are always single factors which can influence the growth in a particular area or market. A good example of this would be an industry with a sudden high demand for products, prompting hundreds of additional jobs and people moving into the area, pushing the growth rate up above national average.
On paper, markets with above national average job growth are attractive for real estate investments. However, if the growth is hinged on one industry or one specific company, then it might not really be as “safe” a market as maybe one market with a continual average growth rate across multiple industries and sectors.
The higher the overall population of a market, the better the investment opportunity with other factors in consideration. Most investors look for larger centers of at least a half a million-people combined with a high area growth rate and high employment growth.
Employment Growth and Diversity
For purposes of this discussion, these two factors are grouped, but they can also be considered as two separate factors as well. It is important to look for markets where there is above average employment growth, low unemployment levels as well as high employment diversity.
Typically, multifamily investors should consider at least the past 5 to 10 years in determining the employment and unemployment trends in the market. The 10-year information provides the historical overview while the past 5 years is a key study in the trend for the market.
Diversity is critical in the market for the reasons discussed under the area growth topic. The more diversity in employment opportunities with high growth rates, the more people will move into the area.
It is important to realize that a casual glance at the factors determining a top market from an average or poor market is not just what is currently happening in the area. For sound multifamily investment, it will be critical to understand the big picture and the most likely trends for the future.