The Market Always Wins. Always.
You can invest in a great looking property run by an excellent management team, but if that asset is in a bad market, you will at best tread water. More often than not, you will lose money.
While the multifamily sector is enjoying broad success across multiple markets, investors will find the best long-term returns and the highest degree of stability by making sure they are only investing in the best markets.
Here are five critical elements of every good market:
Population Critical Mass
A strong multifamily market needs to have a critical mass of population. Markets that have a population of at least 500,000 will likely have enough multifamily inventory, a broad employment base and more than one competent property manager. While this number is not set in stone, it does give you a good indicator of a stable, safe market.
The U.S. average for population growth is roughly 1% a year. Strong multifamily markets that have met the minimum population hurdle still need to have above average population growth. By investing in a market with above average population growth, you are more likely to be investing in an area where jobs are being created and apartments will be in demand.
While examining population growth in a market, it is also important to understand why the popluation is growing. A market that is growing in population simply because the birth rate is exceeding the mortality rate is not good enough.
Instead, stable multifamily markets have positive net domestic migration numbers (more people are moving to that area than moving out.) The best markets have positive migration year over year for at least the last decade. This demonstrates people and jobs are moving to that area and staying there.
Markets with a healthy job market are key for multifamily investments. At a minimum, you should look for areas that are in the upper half of national employment numbers. This will normally imply a broad-based and strong economy with a diverse sample of employers in that area.
Better than average employment is important, but the growth trend of job creation is the best indicator of the long term health of a market. Again, the markets that are performing above national averages are likely to be the safest areas in which to invest. People will go where there are jobs, and those people will need places to live.
The 10 year and 5 year benchmarks are the most helpful when analyzing job market trends. 10 year trends provide the best historical perspective, while the 5 year trend gives a better indicator of the momentum in a market.
Even if a job market is performing above the national average, it is still important to understand the industries that are fueling that job growth. The most stable job markets (which make the most stable multifamily markets) have medical, government and educational jobs contributing to the workforce. In markets where private industry supports the majority of employment, it is crucial to have a varied employment base. This will protect you from any one company going through contraction and putting the market in difficulty.
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Market analysis and selection is crucial to your investment results.
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