Fundamentals of Real Estate Markets

The fundamentals of real estate span across three broad categories, acquisitions, operations, and dispositions. When you own a property, manage that property, and ultimately sell it, you’ve gone full cycle.

Investors either do these things themselves or partner with experts to do it for them. But where does it all start? For 37th Parallel Properties, it starts with market analysis. Finding healthy real estate markets to invest in is a key to success that should not be underestimated.

As you’ve probably heard before, all real estate is local. So the market conditions in Jacksonville will vary from those in Boston. And Boston’s market conditions will be different than those in Kansas City.

It’s important you know your market prior to investing in any apartment building. What follows are seven factors that can help you identify a quality market worthy of your investment dollars.

Job Growth

One of the first signs that successful real estate investors look for when evaluating a real estate opportunity is job growth, or decline, in that area. The Bureau of Labor Statistics compiles data on the labor market in cities, states, and nationwide. And investing in markets with healthy job growth is part of the fundamentals of real estate.

Obviously declining or negative job growth in a market is problematic, especially if those job losses are sustained. Positive job growth is ideal, particularly when it’s long-standing.

Population Growth

When it comes to economic development, it is clear that people follow jobs. So the fundamentals of real estate demand that investors look for markets with population growth. This growth should be significant and sustained over a long period of time. 

Sustained population growth leads to increased population density. Household formation is driven by population growth. And the more people who are in an area, the more housing is needed to shelter them. 

Therefore population growth drives the demand side of housing. Investing in apartments in markets where the demand for housing is high bodes well for your success.

Diversity of Jobs

Since it’s important to find markets with sustained population growth, it should make sense that you also want to guard against any precipitous loss of those populations. 

What could do that?

As I mentioned earlier, people follow jobs. So a steep loss in jobs could lead to a subsequent loss of population. 

The risk of this happening increases when the bulk of jobs within a market are centered around one industry. The classic example is military communities subject to Base Realignment and Closure (BRAC). When those bases close, jobs go away, and people leave those communities if the military is the main source of employment.

When investing in commercial real estate or apartments, your success shouldn’t depend on the success of a single industry. Instead, you want to invest in markets that have a diversity of jobs. Those jobs should be created by a thriving private industry along with government, health care, and institutions of higher learning all contributing to the labor market.

Fundamentals of Real Estate Says Avoid Landlord Unfriendly States & Municipalities

Rental agreements are contracts that take place between an owner of an apartment building and a renter who wishes to live in that building. That contract spells out the terms of the agreement. 

In general, the renter agrees to pay their rent in a timely manner and avoid destructive and disruptive behavior in the apartment community. The owner should agree to provide a clean place to live where repairs and maintenance are taken care of expeditiously.

Apartment investors should understand that whatever markets they invest in, they will be subject to three layers of real estate law and regulation – federal, state, and local. These regulations can instantly turn a great deal into a headache for real estate professionals.

Federal regulation is the easiest to comply with and makes the most sense. The two big federal laws landlords must comply with are the Fair Housing Act and the Fair Credit Reporting Act. 

The Fair Housing Act says landlords can’t discriminate against people on the basis of race, religion, gender, sexual orientation, national origin, etc. 

And the Fair Credit Reporting Act requires that landlords have to get permission to pull a prospective renter’s credit report. They also have to inform the prospective tenant if they deny their rental application based on something contained within that credit report. 

These laws are common sense and common decency. If the federal government hadn’t mandated these, owners should be operating under these principles anyway. 

Unfortunately, state and local laws can vary wildly throughout the real estate industry. And some of those laws make little to no sense. Nevertheless, both owners and renters are subject to those laws as well. For that reason, it’s important to think twice before investing in apartments where the landlord-tenant laws are unduly burdensome to owners. 

Growing Median Incomes

The multifamily market consists of affordable housing and market-rate housing. Affordable housing is government-subsidized housing. They primarily subsidize rentals for low-income people through the Low-Income Housing Tax Credit (LIHTC) and Section 8.

Market-rate housing is not subsidized by the government. Their monthly rents are set by the market and can go up and down depending on a myriad of factors related to supply and demand. But if you’re investing in healthy markets with both population and job growth then you’re likely to see rent growth and home prices follow.

Rent growth is a positive factor for investors, but if it’s not matched with income growth it can become a burden to the renter. 

Keeping market-rate rentals affordable to renters is a fundamental of real estate that benefits both the investor and the renter. Investing in markets where incomes are rising is wise for the short and long term.

Affordability of Market Rate Apartments

If growing median income is an important factor in both market health and affordability of rentals, then what is considered affordable?

If you look at financial wellness checklists, most financial advisors would recommend capping spending on housing to no more than 30%-33% of your income.

REALPAGE Analytics researched this topic and found that the current rent-to-income ratio is 23% nationally. That’s a healthy number, but as I said earlier, all real estate is local. Some markets have affordable market rate rents while others do not. 

Monthly rents will vary depending on the different properties, but it is best to not be at the extreme ends of the spectrum. Investing in markets that have affordable rents is smart. If you’re contemplating investing in a real estate market where the rent-to-income ratio is above 30%, be sure that the market complies with the next section.

Renting Apartments Should Be More Affordable Than Owning a Home

When renting is more affordable than owning a house, the fundamentals of real estate are aligned with what you should be looking for in a market. The larger the gap between home prices and apartment rental prices, typically the better the environment is for investing in rental property. 

Even if rents rise to levels above what is considered affordable, renting will still be popular if the cost of renting is less than owning a home.

Summary

The fundamentals of real estate are complex, but if you want to make money investing in apartments it’s important that you get them right. Professional apartment investors know that market analysis and finding the right markets to invest in is the first step. 

Successful real estate investors never invest in a property, no matter how good the deal is, without knowing the quality of the market. These seven factors should help you find quality markets to invest your hard-earned money in. But before you become a landlord, be sure you have the time, energy, and expertise to successfully invest in apartments actively. 

Want to learn more about the financials behind real estate investing? We’ve written articles to help new investors identify the cash flow, capital appreciation, tax advantages of real estate investing, and how to manage your property. 

If you’d rather not become a landlord, that doesn’t mean you can’t invest in apartments. There are a few ways that you can avoid the headaches of property management.  Instead, you should consider partnering with a professional who has a track record for success. You can do this through a real estate investment fund, like 37th Parallel Properties Income and Total Return Fund. 

The 37th Parallel Partners Advantage

37th Parallel Properties has been in business since 2008. As multifamily specialists, we have over $1 billion in transaction volume and a 100% profitable track record. We handle everything from acquisitions, to property management operations, and ultimately to liquidating the properties. When you invest with 37th Parallel, you can rest comfortably knowing that you’ve invested with professionals who know how to make their investors money. We’re here for you. So if you’d like to evaluate our current income and total return fund or schedule some time to speak with our team, let us know how we can be of service to you.