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Market Analysis – Friday Fundamentals

Happy new year, and new decade! It’s 2020, and I couldn’t be more excited for the future! I hope your year is off to a great start!

If you haven’t thought about the next year or even the next decade, there’s no better time to start. Setting goals is the first step in turning your dreams into a reality. There are so many great resources and tools out there around goal setting. Learning to organize your thoughts, turn them into goals, and pursue them with action is one of the best recommendations I can make to you. Goal setting has been a journey for me, from starting with New Years resolutions, to writing 10X goals every day, and now to where I’m at today. I’ve found that writing my goals down every day helps keep me on track and focused on taking action every day (ok, I admit – there are days where I slack). One of my current favorite resources and goal setting is The Intention Journal designed by Brandon Turner and published by BiggerPockets. This is a 90 day journal that guides you from setting 3 goals to accomplish in 90 days, then provides a roadmap by coming up with a weekly battle plan, which is executed with daily action. It’s simple, yet effective. Check it out if you’re interested in crushing your goals in the next 90 days.

So with all that, let’s jump into this week’s Friday Fundamental – Market Evaluation.

The three most important things about real estate, you have have heard, are:

  1. Location
  2. Location
  3. Location

This in part because you can do a lot of things to your investment real estate. You can fix it up, change the property use type, use different types of debt and equity to structure the deal, and pretty much everything else except that you cannot move it to a new location. That’s one reason markets are so important. While the market is important, it’s not the only criteria you should look at when evaluating real estate deals. As Joe Fairless says in his book, The Best Ever Apartment Syndication book, the market you select means very little if you can’t execute your business plan properly and stick to the Three Immutable Laws of Real Estate Investing. These laws are:

  1. Buy for cash flow, not appreciation
  2. Secure long term debt
  3. Have adequate cash reserves

By following these three laws, your investment will thrive in any real estate market.

So with that, let’s look at some qualities you’ll want to consider when evaluating a new market. To simplify things, let’s think about what you really need as a real estate investor. You need people to live in your real estate. And those people need jobs to pay you for a place to live. People and jobs are what it comes down to. There are six factors that will give you an understanding of the people and jobs in any market. They are:

  1. Unemployment
  2. Population
  3. Population Age
  4. Job Diversity
  5. Top Employers and Businesses
  6. Supply and Demand

Let’s start with unemployment. Tenants need a job so they can pay rent to you, the landlord. You can find how many people have jobs (or don’t) by tracking the unemployment rate using government data on Factfinder.Census.gov. You want to look at unemployment rate trends in a particular market. Most importantly, you’re looking for a downward trend in the unemployment rate, meaning more and more people are gaining employment. This indicates a good job market.

The next is population. You want people in your market. Afterall, they are who will live in your property. More specifically you want a growing population. Once again, you can find population data on Census.gov under Annual Population Estimates, and look at the 5 year trend. Has the population increased or decreased?

Population Age is a factor too. While there may be a large population, you might be specifically targeting a certain demographic for your apartment community, maybe Millennials for example. You can find population demographics on Factfinder.Census.gov in the Demographic and Housing Estimates table.

The 4th factor in your market research is job diversity. Job diversity is important because you don’t want your market tied to one or two industries only. If that industry is in a downturn, then it will likely lose jobs and population. Think about Detroit and the automotive industry. You can find industry information at the Census.gov website, searching under the Income tables, specifically in the Selected Economic Characteristics Tables. You can find the number of jobs by industry, giving you an ideal of how diversified the jobs in that market are.

The 5th factor is top employers and businesses. You also want a diversified job market across many difference employers. A market with only a few large employers can be too dependent on the success and outcome of that company. If that employer moves locations, or shuts down, then your market loses a large portion of jobs. This research takes a bit of digging. Typically you can find the largest employers in a market with a quick google search. Search your city + top employers and list those.

Lastly, we want to touch on the supply and demand of rental property in your market. Sure there may be a lot of people with good jobs in the market but if there are twice as many rental properties as there are people, then likely you’ll have a hard time finding people to live in your property. Supply and demand is a balance. You can start by analyzing vacancy rate and median rental rate trends in your market. You’ll want a downward trending vacancy rate and an upward trending median rent rate. These data points can be found at the Census.gov website under “Selected Hosing Characteristics” tables. And lastly, as part of you supply and demand analysis, you want to look at the supply of rental properties by analyzing how many new properties are being built. You can find this information at a related but different site called the Building Permits Survey on the Census.Gov website. You’ll want to look at permits for 5+ unit dwellings and look at the trend in permits granted.

With these 6 factors you’ll have a good idea of how your market has fared over the recent years, and reasonable expectation how it will continue to trend. Once you have identified 2-3 markets, you can begin to start your property search for a property that meets your investment criteria.

Resources

The Intention Journal by Brandon Turner

The Best Ever Apartment Syndication book by Joe Fairless

Factfinder.Census.gov

Building Permits Survey

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