Multifamily real estate syndications offer endless options for investing in various markets. As a passive investor in a syndication deal, you’re able to leverage the experience of professional, boots-on-the-ground teams. However, while the options available to you are exciting, the process of finding and vetting the best real estate markets can also be overwhelming.
Rather than wasting your precious time and energy cross-referencing lists and researching current population trends, I recommend starting by assessing your personal investing goals.
Perhaps you’re hoping to invest in a growing market that will also provide excellent cash-on-cash returns.
To make the process of vetting real estate markets less intimidating, I’m giving you my basic framework. This research checklist will save you from diving down rabbit holes and help you narrow down what to look for when evaluating potential investment opportunities.
Here are the top ten factors to take a close look at when researching potential real estate markets:
- Job Growth Trends
- Population Growth Trends
- Job Market Diversity
- Landlord and Tenant Laws
- Geographical Features
- Cost of Living
- Local News
- Local Government
- Your Competitive Advantage
Job Growth Trends
Trends in job growth are the most important metric to evaluate in each market. Steady job growth indicates a healthy economy and is a leading indicator of population growth. In addition, a healthy economy will likely attract new businesses, developers, and residents to the area.
As you know, the more jobs and the more residents an area has, the more likely a strong tenant base can be maintained. As more people are attracted to the area, the demand for viable housing increases, which drives up rent and real estate prices.
Population Growth Trends
The population is an important metric to evaluate after job growth. However, job growth should still be researched first, since the people in a certain area could be affected by natural disasters, and migration patterns, among other things.
Look for an area with upward population growth over a long period, not just a temporary bump due to extenuating circumstances. Job growth is the main supporting factor for population growth in the area.
Job growth and population growth together provide a complete picture of the health and future of a given market.
Job Market Diversity
Be sure to find an area with various industries supporting the local economy.
If most of an area’s jobs are in one industry, the case for strong job growth becomes diluted.
For example, if most of an area’s jobs come from the tourism industry and recession hits or a negative news story surfaces, decreasing the number of visiting tourists, job growth and population could be largely affected. A diversified job market is much more attractive since the economy isn’t dependent on any single industry.
Landlord and Tenant Laws
While Job Growth Trends, Population Growth Trends, and Job Market Diversity are the top three factors to research, you should look at an area’s rental property governing laws next.
For example, rent control is a great safeguard for tenants, but it makes earning a decent return on investment challenging for landlords. Moreover, it’s challenging in areas where costs for contractors, pest control, and property management are steadily increasing.
Local property managers are intimately familiar with these laws. As an investor, it’s smart to leverage their knowledge to gain insight into which areas are landlord-friendly.
Even though they’re many other more exciting things to consider, taxes can significantly impact an investment deal’s bottom line.
State income taxes and property taxes will impact your operating budget and, consequently, your overall return. Since each state has a different tax structure, it’s essential to understand what to expect so you’re not surprised at tax time.
Always check out the actual, physical landscape of the area. Look to see if there are any physical barriers like a body of water, a mountain range, or any other geographical features that could inhibit the physical development of the area.
Coastal cities, for example, are limited by the ocean. As a result, real estate development can only get so close to the water, which ultimately forces development upward or into the suburbs. This geographical limitation drives up the value of centralized real estate, especially during times of job and population growth.
Cost of Living
Be on the hunt for an area where the cost of living is low. Low cost of living, especially in comparison to the median income in the area, will likely contribute to increased population growth. Simply put, if people can easily afford to live in the area, there’s plenty of room for the cost of living, like rent prices, to rise as more jobs and people move into the area.
As you can guess, the factors I’ve previously mentioned are the most important when vetting a real estate market. Check out a few local news stories once you’ve identified a market that seems to fit your investing goals.
The local news can give you a more in-depth understanding of the local economy and the potential future of that market. By checking out the local news, you’ll get more information about new companies moving to or away from the area, upcoming local events, community developments, and much more.
As the local news, the local government is indicative of the area’s future standings. As an investor, it’s wise to invest in an area with strong local leaders supporting new initiatives and an expanding local economy. The local leaders’ vision should include making the market vibrant and welcoming to new businesses and residents a top priority.
When the local government has strong leadership, it’s attractive to corporations, which means that job growth will likely continue.
Your Competitive Advantage
When researching real estate markets, pay close attention to the areas where you have a personal connection. For example, perhaps you have extended family or a good friend who lives there. No matter how insignificant it seems, a personal connection may give you greater insight into a particular area, more so than other investors.
More consideration should be given to any market where you have a competitive advantage. In addition, local connections or personal history with a particular area can put you several steps ahead of other investors.
Your Role as a Passive Investor – Do You Need To Research Real Estate Markets?
The beauty of being a passive investor in a real estate syndication deal is that you don’t have to shoulder the responsibility of doing the work of choosing individual properties. However, while your sponsor team does the heavy lifting on your behalf, it doesn’t get you off the hook entirely.
You must still do your due diligence on the markets you’re investing in. Consider this, you’re investing a large amount of your hard-earned money, and that’s not something to be taken lightly. Completing your due diligence will help you ensure your chosen markets are solid markets that will help you meet your investing goals.