How to Identify Top-Performing Investment Markets

Jim Hamilton

In the U.S., there are over 71,000 apartment properties with over 100 units. How does an investor narrow this enormous investment opportunity set to markets where they would have the highest probability of achieving their target investment returns?

Decades of experience through many economic cycles has put our team at Brixton Capital in a position to offer tips.

We begin by focusing in Western and Southwestern markets, within a three-hour flight of our home base. Furthermore, we believe that our team can only achieve true expertise in five to 10 markets at a time. This ensures our investors that we have the knowledge and competitive edge to compete with and outperform local investors in the area.

Within our geographic reach, we identify markets that demonstrate long-term supply/demand conditions that will lead to higher rent growth and higher occupancy over time.

Check Future Apartment Supply

A metro area that has a projected future supply that does not keep up with projected demand is ideal for those looking to invest in existing multifamily properties as well as developing new assets. We consider the projected number of new units being delivered a percentage of the existing inventory. Within each market, we seek locations where new supply may be limited by a lack of available land, zoning regulations or a higher cost to build new units.

 Determine Demand and Affordability

There are no better indicators of future demand for housing than population and job growth. The locations that we invest in have all seen over 10 percent growth in new households over the past 10 years, and are projected to continue to out-pace the rest of the country in growth moving forward. In almost all cases, the primary driver of growth in these markets has been the addition of new employment. Markets that attract a diverse base of economically resilient jobs with favorable wage levels produce a disproportionate share of qualified renters.

Affordability is critical to our assessment of demand. We target markets where rents are less than 25 percent of incomes in the area. This ensures that our tenants can meet their rent obligations. If an investor executes a value-added business plan, the new higher rent will still be affordable to the typical essential worker (nurses, teachers, police officers, construction workers, office administration, manufacturing, etc.).

Similarly, we assess the difference between the cost to rent and the cost to purchase a home. Rising home prices and mortgage rates have made homeownership too costly for many middle-class people. A market where there is a large spread between rents and homeownership (mortgage payment, property taxes and insurance) is a good indicator that rental demand will remain strong.

Study Rent Regulations

Along with the data analysis that points us to markets that offer the highest potential for investment opportunities, we also evaluate the political and regulatory environment of a market. Lower taxes and a favorable regulatory environment give us confidence that the area can continue to attract businesses, grow jobs and ultimately lead to new in migration to the region.

Equally important is the housing regulatory environment of a market. Areas with local or regional growth and/or development limits are viewed favorably as there may be a limit on future competitive supply. Conversely, areas with rent control regulations can adversely impact an investor’s returns.

Filter by Submarket and Neighborhood

This top-down analysis has led our firm to invest in markets like Dallas, Houston, Austin, San Antonio, Seattle, Phoenix and Salt Lake City. Within each of these markets, we apply a finer filter to determine the specific submarkets and neighborhoods that best fit our investment profile. This knowledge is only achievable by becoming local market experts.  Building relationships with successful brokerage professionals and property managers in the area is critical. They can provide the microdata you need to make informed decisions and, ultimately, to execute deals and then effectively manage your properties.

The multifamily market continues to attract strong investor interest. With careful analysis from top to bottom and some strategic relationships, investors can still identify the best deals that yield strong risk-adjusted returns and avoid making critical mistakes.

 Jim Hamilton is vice president of Acquisitions of Brixton Capital, a private real estate investment firm that targets multifamily, retail, land and other property types.