Best Markets: 5 Factors to Determining a Good Market
How do we find the best markets to invest in?
I get asked a lot of times about why we invest almost exclusively in Florida. There are a lot of good reasons for that. Some people think we want to invest in Florida because the population is growing. And yes, that is one reason we like Florida, but people don’t realize that we do an intense dive into research before deciding to invest in any market.
As you probably know through your own real estate, the markets are always evolving. We are constantly evaluating markets based on data and research. We never leave that up to just our instincts or anything random.
We have seen that every city has its economic drivers and growth indicators. The beauty of the time we live in now is that data is easily tracked and documented on the internet. We use many different sources when researching a market, like the U.S. government agencies, the Census Bureau, the Bureau of Labor and Development, and the city’s Department of Economic Growth and Development. In addition, we check for permits that have been pulled in in the particular areas in which we’re looking to invest.
Our process is very methodical, rigorous, and unbiased. Then again, the model is always shifting. Some of the most important things that are just tried and true for us to evaluate for a market are:
# 1 Population Growth
We look at the projected population growth over the next 5 to 10 years. We like to know that the market we select is an area that is growing and expanding, not contracting and getting smaller.
#2 Economic Diversification
Another part of that is looking at the economic drivers in that particular city. Is it just one hospital that employs everybody, or do we have a hospital and a university? Do we have some tech companies or a car company, for example? Those factors are all critical, and that information is very easily accessible. We look for a diverse market, so if one industry fails, we’ve got a stable economic environment.
# 3 Pro-Business and Pro-Landlord State
Another factor we examine is if the market is pro-business and pro-landlord. The importance of being in a business and landlord-friendly market was made especially apparent when we went through COVID. Thankfully, we were not in any of the markets that weren’t. During COVID, we saw firsthand that if the businesses and economy remained largely open, most everybody paid their rent. We saw that demonstrated through COVID as all of our properties and rental collections stayed above 96%.
#4 Building Permits
We look a lot at future planned construction to see what sort of building permits have been issued by the cities. This shows what kind of competition is coming near us or would affect our property if we choose to buy it.
Through this period, we have learned there is a real housing shortage. This housing shortage started after the Great Recession in 07-09 and has never really caught up. Then on top of that, we had COVID, so many people just stopped building during that time.
Now, many have tried to pick up building again. However, there’s also a huge shortage of building materials. Everything is extremely expensive right now, so we do not see a lot of projected buildings, even though the areas we’re looking at have a lot of housing shortages. We have talked to different city officials where we have invested or plan to invest and have gotten ideas of how long this housing shortage is expected to last.
In some markets, they say it could be upwards of 10 years, so we’ve placed ourselves uniquely during this period with the multifamily apartments that we have found. We put them under contract and then present them to our investors. Again, these properties are in incredibly great markets where there’s a real supply issue, making them incredibly profitable deals.
Normal rent growth in the past before this craziness of the last few years was two to three percent. It’s been in double digits in the markets we have purchased for at least the last four or five years.
In Tallahassee, Florida, a market where we just purchased our 4th property, we are even seeing rents at 18 percent between 2020 and 2021.
#5 Plan of the City
The last factor we look at in every city we consider is the city’s planned path of progress. Cities we look at have plans to grow new transportation or big industries coming in. We’re constantly checking on that city and getting that plan to see what’s going on.