How to Choose a Multifamily Market (or Submarket)
Learn which five metrics you need to know to make a wise investment anywhere across the country.
- 5 Essential Metrics for Multifamily Market Success
- 1. Decoding Vacancy Rates
- 2. Job Scenarios: Employment Growth & Diversity
- 3. Tracking Rent Growth
- 4. Supply & Demand: Getting a Grip on Absorption Rates
- 5. Price-to-Rent Ratio: More than Just Numbers
- Taking the Leap into Multifamily Investing
- Research, Research, Research!
- The Wider Picture
- Wrapping it Up: Your Multifamily Journey Awaits!
- Get Financing
Investing in multifamily real estate is becoming a go-to move for many. Not only can it offer consistent rental income, but it can also provide the chance for property appreciation over time. For those on the fence or just starting out, understanding the crucial metrics can make the difference between a savvy investment and a potential misstep.
5 Essential Metrics for Multifamily Market Success
1. Decoding Vacancy Rates
At its core, a vacancy rate tells you how many units in a given building are unoccupied compared to the total available. Think of it like seats in a movie theater. If you walk in and only a few seats are empty, the movie is probably popular, right?
Similarly, a lower vacancy rate in a multifamily market usually means there's strong demand for rental units — or not enough apartments to rent, period. This can lead to more consistent rental income for you as an investor.
So: Where can you find vacancy rates? You’ll need to do your research at the submarket level, for sure, but often you can find market-level data in various reports put out by major brokerages and data providers, from Marcus and Millichap to Yardi Matrix.
Note: Some places might refer to occupancy instead of vacancy. As a metric, occupancy is simply the inverse of vacancy. If a property has a vacancy rate of 5%, its occupancy rate is 95%.
2. Job Scenarios: Employment Growth & Diversity
You know the saying, "Don't put all your eggs in one basket". It rings true here.
If a town's main source of employment is, say, a single company, what happens if it shuts down? The risk is higher that residents might struggle with rent. On the other hand, a city with diverse job sectors (tech, healthcare, education) has a safety net. If one industry takes a hit, others will likely compensate.
Markets with varied and growing job opportunities often prove more resilient, making them attractive for investment. You can get a good idea of a market’s employment growth and job diversity by searching for the city (or metro) on the Bureau of Labor Statistics’ website.
3. Tracking Rent Growth
Increasing rent is more than just a way to boost income — it's a signal of a prospering market. If, year after year, you notice rents are on the rise, it suggests there's robust demand and possibly limited supply. For an investor, this might mean a promising return on investment and a steady income stream.
The best place to look for rent growth figures include market reports, data service providers, and even in real estate publications.
4. Supply & Demand: Getting a Grip on Absorption Rates
Imagine you run an ice cream shop, and you release a new product — say, a unique, onion-flavored ice cream flavor (Don’t gag; it’s probably nice! And, apparently, it’s also an actual thing). If you produce 1,000 tubs and they're all snapped up within days, it's evident there's solid demand. (And some…interesting tastes in your area.)
The same concept applies to multifamily housing. If new apartment complexes are filling up fast with tenants, it's a healthy sign of demand outpacing supply. If new developments are taking a while to lease units — or, more importantly, existing properties are struggling to fill vacant apartments — it’s best to dig deeper to ensure it’s not something that could impact your investment, as well.
It can be a little tricky to get solid absorption data, but any investment broker should be able to provide it, and you’ll often see figures referenced in market reports.
5. Price-to-Rent Ratio: More than Just Numbers
The price-to-rent (P/R) ratio is a handy metric to gauge if it's generally better to rent or buy in a particular market. If you come across a lower P/R ratio, it could indicate that purchasing property is more economical than renting. And while this doesn't directly relate to renting out multifamily properties, it can provide insights into the overall real estate climate of a region.
There are various places on the internet that compile P/R ratios for cities across the country. Just be sure to double check the math to ensure you’ve got a valid metric on hand.
Taking the Leap into Multifamily Investing
Research, Research, Research!
Entering the multifamily real estate game is more than just knowing your numbers. It's about understanding local nuances, staying updated with the latest trends, and sometimes, trusting your gut.
Tapping into local and national expert networks, joining real estate forums, and staying on top of area-specific news can give you that extra edge.
The Wider Picture
Beyond metrics and rates, it's essential to consider the broader socio-economic and political environment of a potential investment location. Are there any upcoming infrastructure projects? How's the overall safety and livability? These factors can heavily influence rental demand and property values.
Wrapping it Up: Your Multifamily Journey Awaits!
Taking the plunge into multifamily real estate might feel daunting at first, but with the right knowledge, resources, and mindset, it's a journey filled with potential and promise.
Remember, every seasoned investor was once a beginner too.
So: Arm yourself with the right info, trust the process, and let the world of multifamily real estate open its doors to you.