057: Our Little Black Book for Using Metrics to Make Investment Decisions
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Most people know the three old school rules to real estate, location, location, location. But from our experience, it’s a little more complicated than that.
For apartment investors, success often comes down to the location and market you’ve chosen to invest in. We talk a lot about landlord-friendly states, the tax laws within those states, and how up-and-coming neighborhoods for young families are prime. ✨✨
But if you’re a new investor, a market selection can seem like a daunting task and everyone has an opinion on where and how you should invest, from finance bros on Reddit to your Uncle Henry at Thanksgiving.
So why should you listen to us? We currently have over 200 million dollars in property ownership and have been apartment operators for over 3.5 years– meaning we survived the pandemic apartment freeze, and have gone from 0 to over 5,000+ doors in 3.5 years. 😬😬
Then we decided to dedicate our wealth of knowledge to this incredible audience of high-level investors to grow your wealth. So when it comes to knowing where you should invest, we might have a proven opinion or two.
Here are the four must-know metrics for you to know as an apartment investor beyond location. 🧐🧐
Find Your Hive
The first metric you need to know as a real estate investor is to understand the net migration during a set period of time. Net migration figures can be some of the most important metrics to analyze since it speaks directly to the population changes in an area.
Basically, knowing who is moving in versus who is moving out. A reflection of a positive net migration speaks to the future performance of that area. 💡💡
Think of this as something similar to the birds and the bees. We know how this sounds but stick with us!
Bees are always on the lookout for a new home–aka hive– 🐝🐝 to settle in. However, bees, similar to us humans who have several Zillow tabs open, are always looking for the best and most optimal home to live in. Once it’s located, all the bees swarm in and make themselves comfortable. Even after the bees have been relocated by a professional beekeeper, the pheromones sense still lingers and makes the location still attractive to the next colony of bees. You could say there was a buzz about it.
What makes a market attractive to other people is the opportunity in that area. Therefore, you will always want to invest in markets with strong net migration numbers. It’s a good sign when you see people wanting and relocating into an area. 🤓🤓
So where are these popular and in-demand places? We attached an image for your reference. In the show notes of today’s episode, we’ve included a map of the US with the highest projected net-migration data for your reference.
Some of those places include… Phoenix, Arizona, Dallas-Fort Worth, and Houston, TX.
Go Where the Jobs Grow
Go where the jobs grow. 😌😌 In many ways, this is probably the leading indicator that drives net migration into that area. Metros like Dallas-Fort Worth, Phoenix, Austin, Houston, and Memphis are just some examples of booming job economies that have come on the scene in the last decade. 🏙
These metros are attracting home-grown and relocating companies in tech, finance, healthcare, bio-science, high-tech manufacturing, and transportation.
But what about the whole work from home movement?
While you’re not wrong to think that, a lot of these companies still need a “home base” to manufacture products, build, and construct– and those laborious jobs can only be done in person. No matter how big of an impact the work from home movement has.
Here’s the key when scouting where the jobs are: look for locations that have a well–balanced job base. This protects the area from having a massive drop such as in the case of secondary or tertiary markets which are only supported by one or two companies. 🧐🧐
Our recent deal in Atlanta, has a diverse and strong economic driver: not only it’s less than 10 miles away from the #1 busiest airport in the nation but Delta Airline, Microsoft, google, home depot, and UPS are all there.
Remember when everyone was freaking out a year ago when Elon Musk threatened to take the Tesla factories out of California and relocate them to Texas? It shows you the power one company has, and the residents who live there– or don’t. 😉😉
The Inventory to Construction Pipeline
Next up is where things can get a little technical, but totally necessary when looking at your metrics on where you want to invest in apartment syndication. Multifamily apartment properties’ revenue and residents’ ability to not just afford rent, but also rent increases, indirectly correlate with the type of employment opportunity in the market.
You want to make sure the jobs that are booming in that area can pay your potential residents whatever the economy throws at them. This is where a strong job market comes into play and will drive up net migration into a given market thus increasing the demand for housing in the area.
So how do you calculate this metric? How can you ensure that the location you’re looking to invest in will have the right residents to occupy them? You have to look at the physical building and supplies that support them– and there are two variables to consider when doing so.
#️⃣ 1️⃣ Looking at the existing inventory simply means how many units exist and are available to lease right now, currently.
#️⃣ 2️⃣ What is the current construction pipeline? This factors in the number of units that are projected to come online within the next one to three years. They’re on the horizon of being built.
Both variables are important to know since they will be a clear indicator of whether or not demand is going to keep up with the available supply. When you said this, this reminds me of our Atlanta property that we mentioned early, there’s no current construction pipeline within the 5 miles radius from it… Talk about demand here!
So what indicates a good metric for these variables? Ideally, you want to invest in markets with low available current supply and little to no apartments coming online.
It can be but consider this. For us, the Kitti Sisters, one of our investment criteria is to pick sub-markets with supply constraints with both physical and administrative barriers to constructing new buildings because these limitations will support our rent growth without diluting our resident base.
This makes sense because having a strong rent base is critical to the overall success of your investment, so securing those places where the income is flowing without having to worry too much about the competition will get you to where you want to go with your investments.
Relating this number to the net absorption rate, this number represents the total number of units in the market that became physically occupied in a given period minus the number of units that became physically vacant. Strong positive net absorption indicates that demand is outpacing supply, which directly impacts rent growth.
No Vacancy
When supply is extremely tight and there are a limited number of new units available, the area’s vacancy rate will be very low. That’s why we traditionally look for physical vacancy rates at 8% or lower.
Low vacancy is great for many obvious reasons, tenants are leasing, secure cash flow, and in a location that is clearly desirable. The 8% figure only confirms that.
We can hear some of you already asking “this is all great, but how do I, as a passive investor, know where to start when trying to look for these numbers?” Leave that to your general partners. 🤔🤔
Want to know if your GP is legit? They should be able to present these numbers right away during the webinar presentation and if for some reason you asked them and they don’t reply then it’s a red flag. This may mean they probably haven’t done the necessary market study to ensure the investment thesis they are proposing is viable.
So, how are we feeling about just relying on location, location, location? Hear this, it’s not that we completely disagree with those rules, it’s the why behind the what that we want to emphasize here. Why should you invest in a location that makes all the difference when you’re calculating risk, bringing in other passive investors, and feeling secure in your investments. Especially if you’re starting out.
You’re more than capable of doing the hard work and due diligence that will make you a more confident and financially free investor, and it will only lead to greater rewards in the end. 🙌
That’s it for today’s episode! As always, be sure to check out our previous episodes at thekittisisters.com/podcast, plus follow us on Instagram @thekittisisters so you never miss an episode.
Thank you all for being here, before you leave, give us a rating and review it means so much to us when you do.
Talk soon!
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