Who cares!??…you ask. Are you saying that the most recent multifamily report from Marcus & Millichap should be ignored?…or the top 25 list of cities to invest you read about on BiggerPockets is pointless…that just doesn’t make sense…or does it?…
Let’s take a step back and think about this from the perspective of an investor getting started in the market with 1-4 unit properties. And it’s important to note that market mix (the mix of MF properties compared to SFR) in most cities is very low…usually around 5% of total housing units. And 90% of that inventory consists of 2-4 unit properties, with duplexes far outweighing 3-4 unit properties….and 5+ units being a large minority.
Traditionally, the investment real estate “market” you’re reading about on CBRE does not include small multifamily properties and focuses solely on the performance of large developments…typically over 300-units. “Research” is completed in aggregate across major metropolitan statistical areas (MSA’s) with multiple counties making up the research area. Everything is dumped in the same pot, analyzed with a mix of other aggregate data, and “poof” out comes the state of investing in every city in the country. Simply magical… To compound the confusion for folks buying 2-4 unit properties, most real estate boards and associations lump 2-4 unit properties in the “single family” category, making it almost impossible to get any read on this asset group without access to raw data.
So, next time you read the national economic indicator report from the National Association of Realtors you’ll be wasting your time…well…there are a couple important things in there…maybe… I’m not suggesting you ignore data that makes sense like unemployment rates, planned development dollars, city bond ratings, and general health of the local economy, etc., etc. I am saying look at your business model very carefully and make your own market data. If you are investing in the small MF market, you can create isolated phenomena. For example, say you invest in a C-class location, have a very good tenant screening process…and you have safe, clean, and appropriately priced units. And also say you have developed a business model working with local housing authorities and take vouchers for section 8 or veterans.
Is it plausible that you would have tenants paying market rents, zero vacancies and annual rent increases for years?…yes, yes it is. If this is your business model, market data becomes virtually pointless…who cares about median income and job growth when none of your tenants have jobs?… Getting to the point…. What factors should you be looking at, then?…Here are a couple to consider that have nothing to do with financial calculations but have much more impact on whether you will be successful in the long-run.
- The relationship between purchase price, current value… and future value
- Occupancy, tenant class, tenant mix, lease terms and rental rates
- Property condition and needed repairs
A couple of quick tips:
- YOU CANNOT GO WRONG WITH SAFE, CLEAN, AND APPROPRIATELY PRICED UNITS.
- DEVELOPING A FOCUS WHEN INVESTING IN RENTAL PROPERTY AND REPLICATING YOUR MODEL IS KEY.
- DEVELOPING RENTER PERSONAS AND THEN CATERING TO THOSE PERSONAS WILL LEAVE YOU WITH A FOCUSED POOL OF HIGHLY-QUALITY TENANTS.
- BEING RESPONSIVE TO (THE RIGHT) TENANT NEEDS WILL LEAD TO LONG-TERM STABILITY AND NEAR ZERO VACANCY RATES.
I’d love to hear your thoughts; drop me a line hello@RealizePM.com or stop by the website for more information about investing in real estate https://RealizePM.com.com/
