If you're considering diversifying your investment portfolio, the multifamily real estate investing field is one of the most lucrative areas you could venture into. However, like any other form of investment, success in multifamily real estate investing heavily relies on your understanding of the market. In this comprehensive guide, we'll delve deep into the process of choosing the right market for multifamily real estate investing.
Understanding Metropolitan Statistical Areas (MSAs)
In the world of real estate, MSAs or Metropolitan Statistical Areas hold immense importance. With 384 MSAs across the United States, you have plenty of options. These regions are usually defined around cities and include the city and its surrounding suburban areas. Information about MSAs is readily available and comprehensive, making them ideal targets for your real estate investment journey.
Local Markets
The most familiar market is your local MSA, essentially your backyard. As a local, you have a unique advantage over outside investors - the benefit of understanding the community dynamics, potential growth areas, and knowledge of local development projects. Contact your local Department of Economic Development and Building Department for in-depth data about your locale.
Hot Markets
Another option is to look for the hottest real estate markets around. These are cities or MSAs showing signs of rapid growth and development. You can find these hotspots with a quick Google search for terms like "best cities for real estate investing" or "hottest real estate markets." These markets often provide excellent potential for high returns on investment due to their popularity and rapid growth.
Cold Markets
Alternatively, consider investing in a "cold market," which is often overlooked by investors. These markets are generally defined as regions where the real estate market isn't performing well compared to others. Look for these markets by searching for "worst places to invest in real estate" or using the Milken Institute's report on the best-performing cities. Remember, a slow market today might be an emerging market tomorrow, and spotting that trend before others can be lucrative.
Other Markets
Lastly, consider markets where you have personal connections or specific interests. For example, if you have friends or relatives living in a specific MSA, or if you have lived there before, these markets might offer unique advantages. It could be due to an understanding of the local market, a person on the ground to manage the property, or simply a fascination with a certain area.
Essential Market Research Metrics
Once you've identified the markets you want to research, you need to look at four key metrics: Job Growth, Population Growth, Cap Rates, and Employers Moving In.
Job Growth
Job growth is one of the most important metrics to consider when selecting a market. As people often move to follow jobs, MSAs with strong, sustained job growth are usually excellent investment targets. MSAs with recent strong job growth after years of poor performance are known as emerging markets. To obtain this data, consider using resources like CoStar, the Milken Institute's "Best Performing Cities" report, and the Bureau of Labor Statistics (BLS.gov). These resources provide comprehensive job market strength analyses for each MSA in the United States.
Population Growth
Population growth is another essential metric. Increasing populations often mean increased demand for housing, which can benefit multifamily real estate investors. Prioritize markets with 1.5% YoY population growth or more. Resources such as WorldPopulationReview.com and Census.gov provide detailed, up-to-date demographic data.
Cap Rates
Cap rates, or capitalization rates, measure the expected rate of return on an investment property. Hot growth markets typically have lower cap rates due to high investor demand. Look for markets with a Cap Rate of at least 5.5% to allow for a realistic return of 6% or above. CBRE's Multifamily Cap Rate Report and local real estate brokers can provide accurate cap rate information.
Employers Moving In
A market with new employers moving in indicates growth and stability, making it an attractive investment opportunity. Resources like BusinessFacilities.com can help you stay updated on significant corporate announcements in your targeted MSAs.
Utilizing Expert Guidance
Real estate investment is a complex field, and there's no harm in seeking professional advice. For instance, market research coach Ashton Shumway can provide insight into your chosen markets and answer any questions you might have.
Deciding Your Markets
After extensive research, it's time to decide on your markets. The two markets that show the most promise in terms of job and population growth should be your chosen markets. Additionally, select a less promising market as your practice market.
Remember, you can always expand your search into other markets or change your selected markets based on changing circumstances. As your team continues to grow in your chosen markets, you'll want to delve deeper into the fundamentals of these areas.
Furthering Your Market Research
Beyond the fundamental metrics discussed, there are several other factors that can influence the profitability of your real estate investment. For instance, analyzing rental rates, housing trends, market cycles, and affordability ratios can provide a deeper understanding of your chosen markets.
The Final Word
The secret to successful multifamily real estate investing is choosing the right market. Although the process may be daunting at first, a deep understanding of your chosen markets can significantly reduce your investment risks. Moreover, success in real estate investing is not just about financial returns – it's also about contributing positively to the communities in which we invest.
Armed with this knowledge, you are now ready to embark on your multifamily real estate investing journey. Stay informed, make intelligent choices, and invest in the future of our cities – one property at a time.
If conducting your own research feels too daunting or time-consuming, there's another route to take: partnering with a capable operator team such as EA Capital Partners. Multifamily real estate is an area where they excel. With our deep understanding of the market and robust operational capabilities, EA Capital Partners will take the lead in researching and choosing the most promising markets on your behalf. You can leverage their expertise and experience to help you navigate the complexities of real estate investing. You can participate in the high-growth multifamily real estate market without needing to become an expert yourself. This allows you to enjoy the potential benefits of real estate investing, such as consistent income and wealth growth, while freeing up your time for other pursuits!
Schedule a complementary one-on-one session with one of our strategists: https://calendly.com/eacapitalpartners
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