One of the main challenges when getting started with multifamily investing is in which areas to look. With the market so hot, many investors are looking outside their own backyards in search for deals.
But where to look? How do you go about it?
This is not a small matter because wherever you choose means that’s where you’ll spend hours and days looking for deals, building teams and managing the property.
In this article I want to describe HOW to go about picking the best areas for multifamily deals and give you 3 resources to help you.
The methodology is to evaluate areas based on these 3 criteria:
Criteria # 1: Look for Areas You Like
Start by picking an area you like (or at least wouldn’t mind spending time in). Maybe you have friends and family who live there or maybe it’s just an area you like. Also consider the travel logistics. Is it a place you can reasonably drive or fly to? For example, I need to be able to fly to it with a direct flight in 2 hours or less.
Criteria # 2: Look for “High-Yield” Areas
If you’re living on either coast (or even some areas in between), then you know that the multifamily market is red-hot. It will be more difficult to find good deals when others are willing to overpay.
That means you may have to look in less-hot cities or secondary markets that may be off the beaten path but offer higher yields.
“High-Yield” areas are areas in which properties are valued for less relative to their income than other areas, i.e. their cash on cash returns are higher (as well as their cap rates).
Criteria # 3: Look for “High-Growth” Areas
You want areas in which employment is growing. And ideally you want that source of employment to be as diversified as possible (to avoid what happened during the recession with areas that relied on only a few industries).
I want to be more specific about how to apply these criteria by using three very useful reports.