I am often asked how and why I selected the markets I invest in. There are numerous factors that go into the decision-making process. We will first focus on the key factors in selecting a market, will then offer a few other factors for your consideration, and lastly will cover a couple more metrics one should keep in mind as you narrow down the search to particular neighborhoods. In the end, we have also enclosed a sample key performance indicators (KPI) market summary of Orlando, FL.
Top 10 KPIs:
Population growth – at least 1% each year (over a period of 20 years that could represent in excess of 20% growth). For smaller cities (under 250K in population) the expected growth rate should be larger and conversely, for larger cities with a higher population base (1MM+) the expected growth rate will slow down. Population growth matters as it ultimately results in demand for more housing (people need a place to live) and provides for a steady stream of customers (potential renters).
Job growth – 2% or more year over year. Job growth matters as it not only brings more people to the area but also provides a steady stream of income for your tenants.
Low Unemployment – at or below the national average (currently at 4.2%). Similar to job growth, a low unemployment rate indicates a happily (or not) employed tenant who generates at least some level of income to cover basic living expenses, including rent.
Household income growth – at least 1.5% a year. While employment indicates a tenant receives a stream of earned income, this KPI measures the growth in such income and hence the ability to absorb rent increases or ability to afford a more expensive asset class.
Job Diversity – diversity of industries, employers, and recession-proof companies (e.g. finance, IT, healthcare). You do not want to invest in a one-horse town dominated by a single employer or two and run the risk of that firm leaving town or closing shop, thereby resulting in a ghost town and no renters.
Crime rate – under 500 of the national index and generally declining. It goes without saying that people want to feel safe at home or be able to take furry Fido for a walk safely. The crime rate not only impacts the demand for apartments but also the potential value of your property. Even the best-looking property (visually or on paper) will have a hard time selling in a crime-infested area.
Regulatory environment – we generally like to invest in business-friendly and landlord-friendly states.
House value growth – 2% year over year. House value growth would indicate overall property appreciation. In addition, the higher home price point suggests buying a home becomes less affordable thereby pushing people to continue to rent or to upsize/upgrade to a nicer rental property.
Rent growth – 2% or more year over year. Rent growth naturally results in higher rent revenue and all else equal in higher operating profit for your property. We have seen unprecedented (double-digit) rent growth in my key markets year over year. This double-digit growth rate is not sustainable in the long run unless wage growth keeps up the pace (which it has not).
Rent to Income Ratio – 30% or less. This KPI is an indicator of affordability. Also, a gap between current household income and median rent suggests there is further room for growth in rent before affordability becomes a constraint to rent growth.
Other KPIs:
Rent to Own Ratio – generally, over 50% suggests a larger renter (vs. homeowner) base.
Supply and demand/absorption rate – the rate at which available apartments are rented in a specific market during a given time period (homes rented divided by homes available for rent over a certain period). It reveals the demand for a property or the market trend.
Other – net migration, commute time to nearby cities, walkability score, national or regional rankings, proximity to shops/retail, the cost to rent vs. own, U-haul migration tends.
Additional Neighborhood KPIs:
Poverty Rate – no higher than 15-20%. This metric is ties to the affordability, ability to raise rents, crime, and overall state of the neighborhood.
Unemployment rate spread vs. the city – no more than 2% over the city unemployment rate.
Income growth outpacing home value growth – an indicator of the path of progress.
Sample KPI Summary:
Vessi Kapoulian
Peeling back the layers of passive real estate investing, so you protect the downside and invest with clarity and confidence.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.
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