"Whats the best market to invest in?"

The short answer is the market you have the most knowledge and connections.

If the market you have the most knowledge and connections is not an option than the below tips and tools will serve as kicking off-point to finding an "invest-worthy" market.

The Initial Silo

Before you spend any serious time analyzing a market you need to understand what kind of investor you are; financially and emotionally. Are you risk averse? Limited capital? Looking for day one cash flow? Short term appreciation? Investment strategies and metrics can vary by region.

If starting from ground zero begin with choosing a region (i.e. midwest, west coast, sunbelt, east coast) based on your investing style. Then narrow your search to metros, and then neighborhoods.

Now on to research.

Understanding Demographics

First - you will need to understand what demographics are important and why.

I break demos down into three categories. (1) Demand Drivers, (2) Economic Health, and (3) Supply & Demand.

Demand Driver datasets provide insight into past/present growth and potential sustainability. 

• Population Growth (historical and current)
• Household Income Growth (historical and current)
• Job Growth (historical and current)
• Home Value Growth (historical)

Economic Health datasets provide insight into how costly, temperamental, and diverse the economy. 

• Unemployment Rate
• Median Household Income
• Cost of Living
• Poverty Level
• Economic Diversity

Supply datasets are most important. This information provides insight into how competitive a market. Increased supply over demand = lower prices.

• % Renter Occupied 
• Inventory
• Vacancy
• Under Construction Units (as % of inventory)
• Absorption
• Delivery

Once you understand the supply side of the equation you can layer the demand numbers on top. Be sure to read up on local legislation and zoning to find/understand supply constraints.

Example of how supply effects rents:

Let's say a metro has 750,000 households. 25% of the population are renters, or 187,500 renter households. 50% of the renter households live in multifamily units (93,750 units). Vacancy rate is 5%. So, there are 89,063 occupied multifamily units. Demand = 89,063 rental units.

Now let's assume the population grew by 3% per year and the proportion of renters stayed the same. Let's also assume no new supply comes to market for a few years. After 2 years the demand would fill all of the inventory. Rents increase. 

Year 1Year 2Year 3Year 4Year 5Inventory (units)93,75093,75093,75093,75093,750Vacant4,6882,016-736-3,571-6,491Multifamily Renters89,06391,73494,48697,321100,241No new supply

You can take it a step further.

How many units per year would need to be built to keep up with growth?

With a population growth of 3%, developers would need to deliver 3,000 units per year to keep up with demand. Here’s what the forecasted supply would look like if 3,000 units were brought online per year. 

Year 1Year 2Year 3Year 4Year 5Inventory (units)93,75096,75099,750102,750105,750Multifamily Renters89,06391,73494,48697,321100,241Vacant4,6885,0165,2645,4295,509Vacancy Rate5.0%5.2%5.3%5.3%5.2%3000 new units annually

Compare delivery/construction metrics with growth metrics to understand the supply & demand landscape.

Applying these demographics

You now understand what kind of investor you are, what region fits that style, and what demos to keep an eye on. It's time to apply this knowledge.

The first step is identifying the metro. Start by compiling a list of possible metros and use Neal Bawa’s rule of thumb guide to filter. You can use my market rankings tool to easily find this data.

Metros:

1. Population Growth
2. Large cities (i.e. LA/NYC) = 10% growth since 2000
3. Smaller cities (i.e. Phoenix, Orlando, Las Vegas, Columbus) = 20% growth since 2000
4. Income
5. 30% growth since 2000
6. Median House/Condo Value
7. 40% growth since 2000
8. Crime
9. Sub 500 on the city-data crime index
10. Major Employer
11. No one employer has greater than 20% market share

Now that you have selected your metro. Begin building a relationship with the top 15 multifamily brokers.

Time to niche down to neighborhoods. Without having boots on the ground it is hard to delineate a good vs bad neighborhood.

Neighborhood:

1. Household Income
2. Between $36-$70K
3. Poverty Level
4. Sub 20%. 
5. Unemployment Rate
6. Not 2% greater than the metro rate.
7. Diversity
8. No on race is 75% or more of an entire population

Path of Progress

Next -  identify the path of progress. This further solidify's what neighborhoods are of the best quality and which neighborhoods you can expect to see growth.

The best way to do this is via the Wendy’s Model. Wendy's historically followed McDonalds in order to attract demand. Follow the national retailers. They will find and create demand. Let them do the dirty work for you. 

The best tool for this is Google My Maps. You can search major retailers (i.e. Target, Whole Foods, Costco, OrangeTheory Fitness, etc.) and pin them to your map. Be sure to keep the pins to a minimum. Be selective. By adding too many tenants you will muddy the map -- defeating the point.

Once built out the path of progress will be unveiled.

Comps and KPI's

You now know what neighborhoods are good/bad and where growth is headed. Time to focus your attention on the real estate. Comparable's and key performance indicators.

Key performance indicators in the multifamily space

• Vacancy
• Cap rate
• Annual rent growth
• Absorption
• Delivery
• Market rent/unit
• Market sales price/unit

Vacancy - Low vacancy = rent growth

Cap Rates - rate of return on a RE investment. High cap rates: prices are low and the investment is more risky. Low cap rates: higher prices and less risk.

Annual rent growth - trend analysis, pair with supply analysis.

Absorption - number or % of units leased over a given period of time. Demand

Delivery - number of units brought online over a given period of time. Supply

Time to run comps.

Rent Surveys & Sales Comps

First, run rent surveys on each neighborhood you identified as “good”. There are a myriad of resources for this -- craigslist, apartments.com, hotpads.com, etc. Build out rent surveys in excel. Make sure your noting things like Class A vs. Class B and renovated vs run-down.

Next, run comps using actual sales data and rents at time of sale. This will give you an average sales price, average rent rate, and gross rent multiplier. Pay attention to the sale date so your not looking at a deal from 2002. It's good to know the history of sales comps but refer to sales in the last 2 years for a more current view.

Done.

At this point you should be educated on the market enough to have a professional conversation with local contacts. If you are investing out of state you need to be able to rely on a local team. In order to gain their trust you need to prove legitimacy. In order to prove you are legitimate you need to show knowledge. I hope this helps get you to that point.