Simple market evaluation for multifamily deals

Congrats! An investor has brought you a deal and asked if you would like to invest in it. You know the investor and trust them to take good care of your investment, but the deal is in a new market that you have not invested in before. The investor's deal summary makes it sound like a great market, but how do you verify that their information is correct? Here are a few quick steps to help you better understand whether a market is worth investing in.

Population

Population growth is important since you need people to live in your residential investment property. A growing population means the city is attracting people to live there, there is a demand for more housing, and there is likely job growth. This is good news for a potential investment. A declining population is bad news. While there may be opportunities in a market with a declining population, you need to be very careful about how you invest in those areas and avoid long-term investments.

Two resources you can use to quickly check the population growth in a market are Google and City-Data.com. With Google, you can search for "<city name> population" and see a chart of the city's population over the past few decades. For Colorado Springs, you can see that the population has been steadily growing since 1990.

On City-Data.com, type in the name of the city. Near the top of the page, under the pictures, you will see the population for a recent year and the percentage growth since 2000. An ideal percentage growth would be at least 20% between 2000 and 2017. Add about a percent per year for each year after 2017.

The most recent year may be a couple years old for the City-Data and Google results, but that is ok for this analysis. Colorado Springs has some strong population growth, so let's take a look at its jobs growth.

Unemployment and Jobs

Two trends to look at for jobs are the unemployment rate and the number of jobs. A site called Department of Numbers has statistics for both of these.

For unemployment, click on the "Unemployment" link on the right side of the page under "Datasets and Tools." The page for Colorado Springs shows the November 2019 unemployment rate at 3.1%. At 0.4% below the national average, this is good. You can also see a drop in the year-over-year unemployment rate. The chart shows an increase in the unemployment rate between 2017 and 2019 when the national average was going down. This could be something to ask your investor about to understand why that happened.

For job growth, first look at the list of all the metro areas to find the 1-year job growth rate. Your market will ideally have at least 1.5-2% yearly job growth to continue bringing in new people. If you want to see more information, you can click on the link for your city to see the number of jobs and charts for the increase or decrease in jobs over time. A slow, steady increase in jobs is typically better to see than alternating increases and decreases each month.

Income

Income statistics can help you determine if your investor can raise rents, which is common for value-add investments, and if incomes are rising to meet or exceed inflation.

Starting with the market-level income, you can use City-Data.com to find the estimated median household income for your city near the top of the page. Using the value from the most recent year and the value from 2000, you can calculate an income growth percentage. For Colorado Springs, it is ($59,514 - $45,081) / $45,081 = 0.32 or 32%. It is good to see growth of at least 30% between 2000 and 2016, with an additional 2% for each year after 2016.

Vacancy Rate

The last market-level statistic to research is the vacancy rate. A declining vacancy rate means there is more competition for rentals, which is good for your rental investment. An increasing vacancy rate means there is too much supply, possibly from overbuilding, a decrease in population, or a decrease in jobs.

The Department of Numbers site has a rent page that includes vacancy rate information. In 2017, Colorado Springs had a vacancy rate of 2.2%, well below the national average, and that rate has been declining since 2007. Although the data is a couple years old, it will be close to the current vacancy rate unless you see a significant decrease in jobs or increase in unemployment from your prior research.

Submarket Statistics

With the data above, you should have a general idea of whether the city could be a good investment, but we all know that location matters in real estate. The city on average may be good, but that doesn't mean there aren't bad neighborhoods within that city. How can you find out if the neighborhood your investor's deal is in is good or bad?

City-Data.com has a map feature that divides a city into small pockets with similar characteristics. Scroll down the page for your city until you see the map. Make sure that the first dropdown says "Median household income". The darker areas on the map have a higher median income. You can find the pocket with the potential investment property and click on it to see some information about it.

The data you want to see are the median household income, unemployment rate, and percentage of residents below the poverty line.

You want the median income to be in line with your type of investment. For B-class properties, that would be around the median income of your city, which for Colorado Springs, could be around $45,000-70,000.

The unemployment rate should be no higher than 2-3% above the city's average unemployment rate. A good unemployment rate for a Colorado Springs neighborhood would be less than 5-6%.

The percentage of residents below the poverty line should be lower than 15-20%, depending on your risk tolerance.

One other statistic you could look at here is the percent change in income since 2000. To see this, click on the "% change since 2k" button above the map. Click on the shape that contains your potential property and find the percentage at the top of the pop-up box. An increase in income could mean that this area is growing or more attractive to residents. A zero or decreasing value could be cause for concern, and something to ask your investor about.

Web Search

The last step for your quick market research is to do a web search for the city. Try to see if companies and people are moving to that city. Is the city on any desirable top 10 lists, like "best places to live"? If people are writing about the city and you see a lot of good news, then it is probably a good market.

Conclusion

You can complete the steps above in a few minutes to understand the fundamentals of your market. The numbers I gave are a guideline for markets as of January 2020. Your numbers may vary depending on the investment and your risk tolerance. If you have questions about anything you found, make sure to ask your investor. On the next deal you see, try these steps and see if your research matches what your investor tells you.