1. Population Growth
In the housing industry, one of the best lead indicators of high occupancy is population growth. When many people are moving to a given area, it causes housing to be in high demand a low supply. This is great for multifamily operators who are driving for high occupancy and for the opportunity to increase rents over time. It’s important to ensure that the population growth is steady long term and not just a temporary change caused by some local event.
2. Job Growth
Job growth is the second important indicator we look for in a strong multifamily market. Although it is tied to population growth (more jobs can drive population growth), a strong job growth rate can bolster confidence that rents will continue to rise. As employers look for more employees, one of the ways they can attract them to their business is higher wages. This increase in wages coupled with the population growth is a strong indicator that rent growth will continue.
3. Median Household Income
The third and fourth points in this article are slightly more particular to the specific submarket in which the property is located. When looking at median household income, it’s first important to understand that you want the median income to be at least three times higher than your monthly rent. This is because a typical property manager will (and should) require three times the monthly household income for all applicants. By finding a submarket where the median income is at least three times your proforma rent prices you are ensuring that you will have a large pool of potential applicants to choose from. However, the story does not end here. You also don’t want a median household income that is significantly higher than three times your rents because this could signify that the average renter will likely be searching for housing that is nicer than the property you are considering. So finding a balance between these two is important when reviewing a multifamily property.
4. Crime Levels
Crime levels are an important consideration when looking at the submarket of a given property. Although many operators run successfully multifamily businesses in higher crime areas, those operators must have property management and team members who are extremely competent in this type of environment. Also, many investors shy away from high crime areas because of the perceived risk. However, perhaps the most important thing to consider when looking at crime is the change in crime. An area with a little crime that has gradually been improving with time could be a great buy while an area where the crime is getting worse is typically best to avoid.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please check out our free ebook "Achieving Financial Freedom Through Multifamily Investing."