5 Keys To Investing In Emerging Multifamily Markets
I think it is critical to a multifamily investor to choose the “right” multifamily apartment complex to acquire.
One of the most critical aspects of this is to find the right emerging markets. I am diligent in my exploration of opportunities in markets where jobs and local economies are expanding. I will take six months to a year to do the research to determine an emerging market. What is one key? I follow the jobs.
What is an emerging market?
Emerging markets are metro population centers in the U.S., and around the world, where there is a strong demand for housing. And, properties are significantly increasing in value. In these areas, more jobs are being created. And, where you have more jobs, you have more people. This creates a pent-up demand for housing, including apartments and single-family homes plus other support services and businesses.
What happens in areas where larger businesses are relocating or expanding?
- New jobs are being created
- Appealing lifestyles are emerging
- Rental potential increases
- Retail shopping centers and services are needed to meet growing population
There may be 20 to 30 emerging markets across the U.S. at any one time.
Key No. 1 – How to analyze a market
First, find the people who know the markets best: Commercial brokers, property managers and others. Start building relationships with these people early on. I may study a market for six months or a year or more before even approaching a broker.
For example, when I thought I wanted to invest in the Atlanta area emerging market, I scheduled a four-day trip. On the trip, I talked to the top people at major commercial brokerage firms (presidents, executive VPs, etc.). When I returned home, I followed up with texts and emails with these new contacts every 10 days. We exchanged articles on Atlanta. I would send them articles and they would send me articles. I also sent gifts (chocolates, gift cards, etc.) to stand out and win favor.
In the beginning, the brokers would send me overpriced properties. I wasn’t interested. As the brokers started to see my property criteria and that I was a serious buyer, they started offering me “pocket listings” that better met my criteria.
Key No. 2 – How to know a market has peaked and not buy there
I am constantly doing research. I had been looking at the Atlanta area for more than seven months. In Cobb County cities, for instance, in Marietta and Smyrna (actress Julia Roberts’ home town!) the properties were peaking and going for $100,000 to $125,000 a door. If I had bought three to five years ago in those areas, I would have done well today. I was not interested.
Key No. 3 – My secret research trick
I have signed up to receive Offering Memorandums (OMs) from multiple brokers in my target areas. The great thing about OMs is that the big brokerage firms have extensive research budgets and resources. They do excellent market research. The OMs always have a wealth of market information with extensive exclusive data in the last pages. I use this data for my own research and share it with my investors. I will occasionally bid on OMs I receive via email (if the numbers make sense) but I do not often win the bid.
Key No. 4 – Sell properties after three to seven years
The primary reason I only hold on to properties three to seven years is that investors generally do not want to invest for longer periods of time on any one property. In my Private Placement Memorandum (PPM) for each property with accredited investors, I usually say properties will sell anywhere from five to seven years. But if conditions are right and I can sell sooner, I will. I will sell especially if I can see the opportunity to double investors’ money. In those cases, each market hasn’t technically peaked, which is good because it’s much easier to sell. Other buyers still see the area as a “hot” market and I am able to get top dollar for the properties. When it reaches the top of the growth cycle bubble, prices will start declining and it is harder to sell.
Key No. 5 – My emerging market buys
Back in 2006, I started researching various population centers around the U.S. where unemployment numbers were some of the lowest. I identified areas such as Odessa and Midland in West Texas. I bought seven multifamily properties in those areas. Then I found similar employment numbers in Central Texas, in Round Rock, Austin and San Antonio. I bought eight more properties there. More recently I bought in an area south of Houston, a tertiary market where $110 billion was going to be spent in the next 15 years and I bought 10 more properties. In that area, I found a town 30 to 40 miles south of Houston, Angleton, that was not as dependent as Houston on the oil industry. At one of the properties, the property manager told me that the property had 100 percent occupancy and 25 families on a waiting list. I bought the property for $8.7 million and two years later it was worth $11.7 million. I bought another near there for $5,225,000 and recently got an offer for $7,225,000. I ended up buying 10 more properties in that market. All of these deals have been “pocket listings” (unlisted offerings that brokers make available exclusively) from brokers with major commercial firms (ARA, Marcus & Millichap, TransUnion, Cushman Wakefield, etc.).
Some big wins in Atlanta
Over the last year, I have focused my research on parts of Atlanta that have emerging markets. I found 90 potential properties, made offers on 45, and was in best and final on four. Unfortunately, I didn’t get any of them. However, recently I was presented two great deals at $37,000 per door. One where the property across the street was just sold into syndication for $66,000 per door. I am currently buying two different properties in the Atlanta area comprised of 458 units cumulatively that I believe will double in value in the next few years.
Summary: Steps in researching emerging markets
- Talk with local brokers.
- Do online research (com, data.gov, globest.com). In Google: type city name and write “economic growth” or “potential new business.” Put city’s name and Forbes, Wall Street Journal or WSJ, Fortune, US News & World Report.
- Research jobs numbers.
- Look at occupancy numbers and trends up or down – Is it 90% and above?
- Look at multifamily building permits being issued in the city.
- Migration information, such as who and how many are moving there.
- Contact local Chambers of Commerce, as they have great info on local business growth.
- Visit the city. Meet withChamber, brokers, others.
- Look for new employers in the area, such as new hotels, restaurants, or Walmart.