Post-pandemic, families are moving from cities to suburbs as remote work becomes common, providing freedom in choosing their location. Corporations like Tesla, Samsung, and Apple have also relocated from expensive states like California to tax-friendly and affordable states like Texas. This trend has impacted real estate markets, creating lucrative investment opportunities.
How to Choose a Location for Real Estate Passive Investing
When choosing where to invest in real estate, consider whether you prefer local rental properties or ventures outside your local housing markets. Limiting your search to the local area restricts your investment opportunities. It makes sense if you prefer managing properties nearby for convenience. However, once you decide to invest outside your local area, numerous possibilities open up, which can be both exciting and overwhelming. The question arises: Where should you invest if you’re not bound to your local real estate market?
Options include major cities like Chicago, Atlanta, or Los Angeles, or smaller metros like Charlotte, Portland, or Nashville. But should you invest in a city just because you enjoyed visiting or had a good experience there? I’ve pondered all these aspects extensively. Initially, when I chose to invest outside my local area, I conducted thorough research on different markets and “best cities” across the country. I considered various factors without a clear understanding of what I was looking for. Getting to know an individual real estate investment market takes a significant amount of time, especially if you haven’t visited in person. It requires extensive research, time, sometimes money, courage, and conviction to commit to a specific market.
To overcome this, I began by assessing my personal investment goals, seeking a growing market with decent cash flow. Based on this framework, Viking Capital has developed a list of ten crucial factors to consider when evaluating a promising real estate market.
10 Key Factors To Consider When Determining What Real Estate Market To Invest In
Key factors Viking Capital’s acquisition team evaluates to find the best real estate markets for our investors.
- Job growth
- Population growth
- Job diversity
- Landlord/tenant laws
- Taxes
- Geographical features
- Cost of living
- Local news
- Local government
- Whether you have an unfair advantage.
#1 Job Growth
When deciding where to invest in real estate, consider local or non-local options. Investing solely locally limits opportunities. Investing outside your area opens up possibilities but requires research and commitment. Assess personal goals for a growing market with good cash flow. Consider key factors when evaluating potential real estate markets.
#2 Population Growth
Population growth is closely tied to job growth. When assessing real estate markets, it’s essential to consider job growth before population trends. Population growth can be influenced by temporary factors like natural disasters or migration patterns. To ensure long-term investment potential, focus on real estate markets with sustained and upward population growth, which is typically supported by a thriving job market. Therefore, it’s crucial to examine both factors together to gauge the overall health and future prospects of a particular real estate market.
#3 Job Diversity
Another important factor to consider when examining a market’s local economy is job diversity. If a given market has a strong job and population growth, but most of its jobs are in, say, the tourism industry, that could be a red flag,
If a single industry is dominating the local economic landscape, that could signal a potential risk. Without a diverse economy, if that one industry topples or runs into challenges, it could risk the whole local economy.
In the case of the tourism example, if a local market is heavily dependent on tourism, a recession could drastically slow local tourism. This could lead to job losses and population decline, making it harder to keep rental units filled.
#4. Landlord/ Tenant Laws
Viking Capital priortizes job growth, population growth, and job diversity when evaluating investment opportunities. Additionally, our asset management team considers factors such as landlord/tenant laws. For example one of our properties in Washington DC has rent control laws in place, limiting rent increases for landlords. While beneficial for tenants, these laws make it challenging to provide quality housing while maintaining a reasonable return on investment, especially with rising costs. Therefore, I seek out landlord-friendly areas for potential real estate investments, relying on local property managers for insights into rental real estate laws.
#5 Taxes
Taxes can significantly impact your investment returns in a real estate market. Consider both state income and property taxes when evaluating potential markets. Some states, like Texas, have no state income tax but rely on property taxes. Others have different tax structures. Certain states or cities may offer tax incentives to attract businesses, which can stimulate job market growth and drive population increase. It’s crucial to understand the tax landscape of a market before making an investment to avoid any surprises.
If you’re in the real estate industry, you know that owning multiple properties and assets in one area can provide significant advantages. For multifamily syndication companies, this strategy can be particularly beneficial, as it allows them to achieve better economies of scale, streamline management, reduce risk, and gain a competitive advantage in the local market.
#6 Geographic Features
When investing in markets outside your local area, utilize tools like Google Maps for research. One important factor to consider is the presence of geographical features that act as barriers to physical growth. These can include bodies of water, mountain ranges, or other natural or man-made elements that limit a market’s expansion. For instance, coastal cities are constrained by the ocean, which compels them to explore alternative options such as vertical development or suburban expansion. This can drive up the value of the centrally located real estate as more people and businesses migrate to the area while simultaneously expanding the real estate market into the suburbs.
#8 Local News
Okay, now we’re getting down to the more nitty-gritty. Once we’re pretty confident in a particular market, we start tracking things like local news. What are we looking for? We keep an eye out for local developments, new companies moving to or from the area, new store and restaurant openings, major local announcements, and more. Anything that gives us a pulse on the local economy, culture, and the potential future of that real estate market.
#9 Local Government
Going hand in hand with local news is the local government. We want to ensure we’re investing in areas with strong local leaders who have a vision for the local economy, bringing jobs and making it a vibrant and welcoming place to live.
Viking Capital likes to see that local leaders are supportive of new initiatives, that they’re forward-thinking about the area’s future, and that their plans and efforts are clear and innovative. Strong local leadership can also ensure an attractive environment for businesses, driving job growth and increasing the potential for real estate investments.
#10 Whether You Have an Unfair Advantage
Last but certainly not least is whether we have an unfair advantage in that real estate market. Maybe you went to college there, have family members who moved there a few years ago, or grew up there. Whenever we have knowledge of the local housing market, economic growth, and a deep understanding of the local government and affairs in a given area, we give extra weight to that real estate market. Our local connections and roots can give us a significant edge over other investors who only rely on information from Google Maps or a quick weekend trip to assess a market. This is one reason why Viking Capital has assets in Atlanta, where our Founder was raised.
How Accumulating Assets in One Area is Advantageous for Multifamily Syndication
- Better Economies of Scale: By owning multiple properties in one area, multifamily syndication companies can achieve better economies of scale. This means that they can reduce their costs by taking advantage of bulk purchasing, shared services, and other efficiencies. For example, if a company owns several properties in the same area, they can negotiate better rates with suppliers, reduce its advertising costs, and streamline its maintenance and repair processes. As a result, they can lower their overall expenses and increase their profit margins.
- Streamlined Management: Managing multiple properties can be a complex and time-consuming task, but owning properties in one area can make it easier. This is because a company can centralize its management operations and take advantage of shared resources. For example, they can use the same staff for multiple properties, share equipment and supplies, and standardize their policies and procedures. This can help them reduce their administrative burden, improve their efficiency, and provide better service to their tenants.
- Reduced Risk: Owning multiple properties in one area can also reduce a multifamily syndication company’s risk. This is because they can spread their risk across multiple properties, reducing their exposure to any one property. For example, if one property experiences a vacancy or a maintenance issue, the company can still rely on the income from their other properties. This can help them maintain a more stable income stream and reduce their overall risk.
- Competitive Advantage in the Local Market: Finally, owning multiple properties in one area can give a multifamily syndication company a competitive advantage in the local market. This is because they can build a strong brand presence and reputation in the area, making it easier to attract and retain tenants. They can also leverage their knowledge of the local market to make more informed decisions about pricing, marketing, and property improvements. This can help them stay ahead of their competitors and achieve greater success in the long run.
Owning multiple properties and assets in one area can provide significant advantages for multifamily syndication companies. By achieving better economies of scale, streamlining management, reducing risk, and gaining a competitive advantage in the local market, these companies can achieve greater profitability and long-term success.
When is the Right time to Invest in Real Estate?
By investing in this sector, you contribute to providing accessible and affordable housing for families who choose not to buy single-family homes. The demand for affordable real estate has been increasing, with recent headlines reflecting the decline in affordability over the past decade.
Housing prices in the US have reached record highs, resulting in a seller’s market and intense bidding wars among buyers. This has led to inflated sale prices, often surpassing the initial asking price by thousands of dollars. Additionally, historically low mortgage rates have further fueled demand, making single-family homes even less affordable for average families. As a result, more people are turning to renting apartments as a viable housing option.
How Passive Investing Alleviates the Task of Property Management and Geospecific Research
Passive investing in real estate offers numerous benefits and allows investors to enjoy the advantages of real estate investment without the added effort. As a passive investor, it is important to prioritize finding a strong sponsor who can provide guidance and inform you about potential deals in the markets they operate in.
While sponsors may provide some information about why they choose a specific market, it is essential to conduct your own research. The fact that a sponsor considers a market favorable does not guarantee that it aligns with your personal criteria or investment goals. Therefore, independent research is crucial to make informed decisions.
Investing passively in a real estate syndication is an effective approach to narrowing down potential markets. When you identify a sponsor with whom you want to invest, particularly if they focus on a specific area, you can concentrate your research efforts on that particular location instead of navigating through numerous random cities. This allows for a more focused and targeted investment strategy.
