7 Smart Hacks For Analyzing Real Estate Investments – Using Data to Verify Profit Potential

They say that analyzing real estate investments is all about location, location, location. But what makes a location a location. With this article, I hope to impress upon you the absolute importance of vetting the neighborhood wherever you might have an opportunity to invest in a multifamily project as a passive investor. The syndicators can do a lot with a property, but not much can be done to the surrounding area. If that area is a relatively bad one, say like what I call a war zone, even the best syndicators will have trouble turning a property around and making it make money for you. Identifying demographic patterns is all about trends that increase the likelihood of success – or doom a project from the start. After all, a multifamily venture is all about maximizing the quantity of units rented yet at the highest rent per unit.

Why does it matter?

Demographics have an enormous influence on property values, and demand, and will help predict the dependability of a business plan in the multifamily real estate market. The more attractive an area, the higher the chances of success for a multifamily syndication. Data undergoing an upward trend bolsters high demand for multifamily housing.

The demographic data points listed in this article all work together in making an area attractive to its existing and future inhabitants. Studying them helps us gain knowledge on those communities. When an area’s population is rising, chances are that the area is offering well-paid jobs and property values are higher. One demographic measurement is not necessarily causal to all the others, but when taken as a whole, you can understand why people will find an area desirable. Demographic analysis helps to describe a community, and therefore a syndication opportunity, by probing into the specifics and characteristics of the people living within the local area and the properties themselves.

Many cities on “The Best Places to Live” lists take into account all of the factors we are discussing here and will generally indicate that an investment opportunity in one of these areas is a pretty good one. But drilling down to the various demographic measurements enable analysis to project the strength and soundness of future income projections.

Analyzing Real Estate Investments – Population Growth

Population growth is a huge factor affecting multifamily housing demand. When this happens, it indicates a healthy area that will likely support the other demographic measurements. We often see population growth driving income growth, or vice versa. Generally, the greater the growth in population, the greater the demand for apartments, as past population growth rates have shown. Demand is a key driver for rent increases. To support this, as population growth generates pressure on employers to increase salaries – incomes go up faster.

You should look for investment opportunities in areas with strong growth rates. Do not invest in an area where the population is shrinking. Period. The cash flow might look great now, but you will likely lose money when it comes time to sell. Remember that this population decline is also accompanied by declines of incomes and depressed home values.

Analyzing Real Estate Investments – Job Growth

Job growth goes hand in hand with population growth, and is a powerful driver of your syndication investment returns, because a steady or increasing wave of new jobs is key for the demand of multifamily housing. A healthy labor market is vital to a continuously rising rate of demand for apartments in desirable neighborhoods. Property values grow in areas experiencing growth in jobs, as newly arriving workers compete for the supply of multifamily units and homes, especially near large employers.

Both the rent profits and the final selling price of an apartment complex is propped up by jobs. Whenever jobs gains are experienced in an area, syndicators are able to push up rents, which leads to appreciation of an apartment community. It’s basically supply and demand at work, and as workers gain financial strength and stability from those new jobs, they are more discerning with their buying power.

Analyzing Real Estate Investments – Median Income

As of 2020, the gap between median income and median home pricing is large, so buying a home is considered unaffordable by many. Throughout the country, home values have outpaced incomes, leading many away from home ownership and toward renting. Good news for anyone investing in a multifamily syndication, especially one focused on affordable housing.

You want to see an income between $40K and $75K. Anything lower will invite less stable tenants and increase delinquencies. Higher income areas, more than $75K, though very desirable, will be competing with home ownership. Also, when looking at an investment opportunity, look at the pro forma rents. They should not be more than 25% of the monthly income. For example, a sponsor wants to charge $935 rent in an area that shows a $45K median income. Can this be done? Well… Yes. But, if the sponsor has a value-add business plan and wants to make improvements in order to get an extra $125 per month, he/she might hit a brick wall with attracting new tenants, since this would be getting expensive, relatively speaking.

Analyzing Real Estate Investments – Crime Rates

Here, you are looking for reduction in crime. Generally, areas with high crime are less desirable places to live and will affect home values among other things. Cities with lower crime rates have lower delinquencies and evictions, which is really important to syndication you might be investing in.

Crime is usually highest in lowest income areas, and can drastically affect desirability. Since many people do not go out of their way to move to less desirable areas, this severely limits the pool of good potential tenants. You will have a more successful out come investing in a lower crime area.

Analyzing Real Estate Investments – Home Value Growth

Simply stated, this is another example and result of supply and demand. The more desirable a neighborhood, the more demand, and in turn higher value. Looking for an increase in value over time shows stability as well as prolonged desirability. People want to live in areas that are considered more prestigious, and because of this, it is easier to find awesome tenants.

A good indicator is the median home value and its growth over the past 15 to 20 years. A multifamily property in an area that saw a 40% or more growth in value of the single-family homes around it over that period, indicates strong fundamentals. If an investment property’s values increased only 30%, but all the other demographic measurement are in the exceptional range, it might still be a good investment, especially if the prospect of really good job growth exists.

Analyzing Real Estate Investments – Flood Zones

With the overwhelming evidence of climate change really happening, and the severity of storms increasing, it is especially important to limit your investments to areas that are considered well outside flood zones. It seems like 100-year and 50-year floods keep happening every other year. Best to be on the safe side, and stay away.

Analyzing Real Estate Investments – Schools

School districts in desirable areas tend to be higher school quality rankings. One reason for this is that the higher property tax base allows more robust funding. When a district performs exceptionally demand to live in that district’s neighborhood rises, driving up property values, and in the case of apartments, rents.

According to the National Association of Realtors, a little more than a quarter of home buyers, when choosing a neighborhood to move to, were influenced by the score of the school or district.

Mitigating Factors

It should be noted that not every city or area will have a perfect score or rating, but will still be an excellent area in which to invest. For example, near many universities, it is not uncommon for medium income to be below the $40K you would want to see. But this doesn’t really reflect the truth on the ground. Many students from out of state and from high-income families live near campus. They do not necessarily have jobs or incomes, yet they still contribute to the local economy with their buying power. Use your best judgement when one of the demographic measurements is a bit out of whack.

Low housing supply means higher demand for housing in general. This extends to multifamily communities. At this writing, we are experiencing a historical shortage that has pushed both single-family home values and multifamily rents to record highs across the country, as an increasing population struggles with limited inventory.

Additionally, total absorption has outpaced overall new construction completions, further illustrating the real demand for multifamily housing. Net absorption a measurement of demand, and is the number of all vacant units subtracted from the number of all newly occupied units within an area during a specific year. It looks at where more units were leased than were vacated. This would indicate positive net absorption.

Helpful Reading

The Hands-Off Investor, an Insider’s Guide to Investing in Passive Real Estate Syndications by Brian Burke

Part-time Real Estate Investing for Full-time Professionals: Upgrade your mindset, portfolio and finances in less than a year while working by Derek M. Clifford

Underwriting 101

5 Multifamily Investment Opportunity Characteristics