The market we select to invest in is one of the most important determinants to our success as apartment investors. It is our promise as apartment syndicators to not only grow our passive investors’ capital, but to protect it as well. Our job is to increase returns and limit investment risks. In this five-part series, I’ll cover key approaches we measure to make sure we find, evaluate and invest in only the best markets for us and our passive investors.
Simply stated, new jobs bring new applicants, which equal more residents. We investigate the overall job creation trends and where the jobs are coming from. We ask ourselves, is this a steady job market and for how long. Is it fluctuating at a greater rate than the overall economy or not? And what’s driving those ebbs and flows. Generally, the larger the market the more stable the job growth because there are plenty of new and existing businesses creating jobs. Knowing which business sectors and industries that tend to relocate workers often and diminish over time versus the opposite are key decision-making components. For example, due to the economic affect the pandemic is having on our society, markets where the bulk of the stable job source are service and retail jobs, caution to invest in apartments should be practiced.
Looking at unemployment rates and the various factors that contribute to unemployment is different than employment growth. Did you know you can have a market with rising employment growth, but no corresponding impact on unemployment? Well, you can. This occurs when the new job creation demographics/capabilities are different than the current unemployed base. We mitigate this kind of investment risk by investing in markets where unemployment is less than the overall US market. Additionally, we love it when, over time, this shows up as more of a flatline than an EKG. Having a steady uniformed trend increases the probability that the market will be comparatively better for apartment investing than those with unemployment rates that are either very volatile, again EKG, or greater than the US average.
Shelter is a basic human need, not a business per se’. When choosing a market there are three areas of state and federal influence that will always come into play. 1. federal equal housing laws, 2. federal, state and local business practices, and 3. state and local landlord/tenant laws. Each impact how we operate our apartment investments. From the tax bill and marketing practices to required standards of living and landlord/tenant rights. Especially when you take into consideration our current environment, it is in the best interest of our investors that we target markets with favorable-neutral landlord laws in regards to evictions and bad debt situations. Stimulus programs can not continue forever. And, as unfortunate as it may sound, there will be those who will take advantage and game the eviction system. Having apartment investments in markets where legal evictions can take 3-6+ months, during which no rental income and no recourse to the loss of that income should be avoided. The circumstances can potential destroy an apartment business.
Crime rate is more of a submarket metric, but nonetheless a very important metric that we always consider. What we pay close attention to is the highest levels of crime; violent crime and drug crime. Both will and does absolutely affect the performance of our investment in real time, day to day, and into the future when we sell or refinance. Generally, what we look for to help mitigate this investment risk is relative crime rates compared to the rest of the market. Somewhat of an even distribution among neighborhood within the market (in this scenario the market is city/town, not state). Our research has led us to the opinion that the neighborhoods in the top fifty percent of crime compared to their local market will materially underperform the other half in terms of rentability, rent growth, eviction rate, bad debt, etc.
The type of product and asset class we invest in skews towards housing for small and new families with school aged children. For us, schools that are comparatively strong in the market matters. A good school rating impacts our tenant base, the local housing grade, the retail surrounding the apartment property, and more. We look for school ratings to be in the top half to the top 3 of all the schools in the market. The way we see it, good schools are part of a profitable probability feedback loop. Good schools typically have more involved parents, more involved parents lead to lower crime in the area, lower crime in the area creates better housing grades and more desirability, desired housing produces a profitable apartment business.
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