How to analyze a new market

Question

Hey everyone!

My partner and I (Account Closed) are relative newbies when it comes to RE investing.  We have each owned and sold single family homes (in San Diego, Virginia, and Boston) and just recently (as partners) sold a small multi-family apartment in Worcester, MA.

We are looking to transition to larger multi-family apartments and are exploring new markets.   Before we make cold calls to investors and realtors all over the country, we were wondering what criteria and metrics would work best to narrow our search?!

Thanks so much!

Matt and Colby

Neil Henderson · Answer

As a first level examination of a market, I would start with examining the population growth over the past five years, then unemployment, then the population demographics (by age), then job diversity, top 10 employers, then finally supply and demand (vacancy rates and 5+ unit building permits). That should give you a high level overview of the market.

Bob Okenwa · Answer

Hey @Matthew RUSINAK. I believe it's best to begin with the end in mind. By this I mean what are you looking to get out of the properties? Just cash flow? Appreciation? Both? Certain CoC and ROI percentages? Each city presents its own advantages and disadvantages but I'd start my plan knowing exactly what I wanted out of the property. Some cities have good cash flow but little-to-no appreciation and may be harder to turn a profit on a sale down the line.

Most investors look for population growth as that is usually a great indicator on the economy of that market and what you can do with rent (in terms of raising it) and how much demand there will be for your product.

I can go on and on, but what I have outlined above is where I'd start with my research.

Rod Khleif · Answer

@Matthew RUSINAK

Hey Matt, when first exploring new markets there's a few primary things I like to research right away.  Focusing on these will allow you and your partner to quickly decide if a market is worth pursuing or not.

- Employment growth

- Population growth

- Top 10 major employers

- Not a "one horse" town

- I like to see a median home price of $80,000 or more

- Low unemployment rate

- General safety

Once you start to dig into your target markets I'd then suggest to do more advanced research and call the local chamber of commerce, economic development office, etc. as well as do research on market rents.

The following sites are great to use for your initial research: bestplaces.net, spotcrime.com, city-data.com, bea.gov, & bls.gov.

James Kojo · Answer

@Matthew RUSINAK

Population growth is probably the best macro-indicator you can use to take a quick test of a market. IF you really wanted to look at a single metric that would increase your odds of success in a given MSA, population growth would probably be it.

Why?  Population growth is a proxy for good economic indicators. Put in the most simple terms: if the local economy is good, people tend to go there and/or stay there. That's probably good for landlords.

That said, it's only a proxy. Why not spend a little extra time to look at the real economic drivers? For me, the top 3 drivers are jobs, jobs and jobs. Allow me to enumerate and expound:

1) Look for a 3-5 year down-trend on overall unemployment rate for the MSA.

2) unemployment *rate* is a percentage, but absolute numbers matter. Look for an expansion in total # of jobs available over the same time period.

3) Look for a diversity of jobs in growing and stabilizing sectors. Growing: healthcare, medicine, IT, biomed, tech, automation, AI,  business services. Stabilizing: government, higher-education (universities), finance. Avoid shrinking or cyclical sectors like energy (oil) or anything else commodities related and manufacturing (sorry! those jobs really aren't coming back.)

After you identify markets that meet an adequate subset of those criteria, you just need to ask the simple question: can I find a deal that pencils in those market? The San Francisco-Bay Area (where I live), meet all of those criteria, but good luck trying to find a cash-flowing deal here! Same story with New York City and the like. You can eliminate those markets just by looking at cap-rates.

What you should have left after all of those have been applied are your target markets. Unfortunately, there aren't any "undiscovered gems" in that list. You'll still have to hustle for deals, unless you invest out in the sticks. At this point, it's really important that you know yourself, know your criteria, and know your game!

Hope that helps.

James

Robert Ellis · Answer

Hi Matt and Colby,

Job and population grown/projection combined with good current/projected returns and affordability.  I'm sure others have posted on this but that's the basic metric many investors use to establish a starting point a determine if further and more detailed investigation is worth it.  After that it would move to the "building team on the ground"/"boots on the ground" stage -  realtor, property manager, lender etc... that you establish a good working relationship with and that has the experience and credentials to get the job done.  After that start running numbers on properties and have a realtor that you work with that is willing to educate you and has had experience working with out of state investors.  Hope this helps and best of luck with everything!

Sergio Fetter · Answer

@Matthew RUSINAK, there is room for everything. Orlando, FL is a fantastic market right now, but the price per door is much higher than somewhere like Columbia, SC. It will depend on what kind of investors you have.

Matthew RUSINAK · Answer

All, this is great information. Thanks so much!

Henri Meli · Answer

@Matthew RUSINAK Not all markets suit all investors. So, it is important for you to know what your end goals are. Some investors have plenty of time on their side, others don't. So, your market will depend on what you want to get out of your investment and in which timeframe.

Alex Price · Answer

Hi @Matthew RUSINAK I completely agree with @Bob Okenwa on beginning with the end in mind. There are markets that cater to both. Spend time identifying which markets cater to what it is you're after and use BP as a resource to connect with those already in those markets to get point of views from active investors. In Ohio for example Cleveland is more of  a cash flow market while Columbus is more for appreciation. Two cities only a couple of hours apart but catering to two completely separate investing goals. I wish you much success my friend.

How to analyze a new market

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