I’ve written a bit about real estate cycles and how to analyze real estate markets to determine if they may be a good place to invest. Using this information that I’ve put together, I’ve written the next section of my business plan:
LISH PROPERTIES BUSINESS PLAN
Criteria for Investment Location
As noted previously, the company will use well-defined financial and demographic criteria for making investment decisions. This section will lay out the demographic investment criteria to be used specifically for short-term â€œvalue playâ€ investments (as longer-term “fundamental” investments will be less dependent on real estate cycles).
The following is a set of demographic and economic conditions that should be examined when considering a location for property purchase:
Population growth or contraction is likely the strongest indicator of near-term vacancy rates, and therefore should be considered a primary decision driver for the company when considering entering into local markets. Ideally, the company would like to see a contracting population due to a temporary and well-understood circumstance (loss of jobs, natural disaster, etc), with the likelihood of expanding population in the near future. Ideally, the population loss has affected property owners and has created a situation where high vacancy is causing price depression in the local area.
Employment growth is a key driver of vacancy rates, and should be considered a key indicator and decision factor when evaluating local markets. In addition to employment growth trends, the company will take into account the type of jobs being created/lost, and whether new or lost jobs will directly influence the property vacancy. For example, new white-collar jobs will likely have a smaller impact on Class C/D buildings than they would on Class A/B buildings.
Multi-family residences go through cyclical periods of expansion and contraction in both income and value, and it is important to not only understand what cycle the local markets are in, but to buy at the appropriate point in the cycle to ensure appreciation and income improvements. Specifically, the company will look for apartments in areas where there has been a recent price/value depression, and where a turn-around is either beginning or on the horizon. While the company should wait until after the â€œbottomâ€ of the cycle, it should be willing to get in shortly after this point, and be willing to accept short-term losses during the recovery phase of the market.
Additionally, the company should be aware of the history of building in the local area, including number of issued building permits, number of new units, and number of conversions. Markets tend to peak around the time of maximum overbuilding, at which point values begin to depress and buying opportunities start to become available (though it may take months/years to reach market bottom from point of maximum overbuilding). The company should use building information to help determine the point in the market cycle, and use that information to help drive timing decisions for buying.
Trends in number of households and household income play a key role in the vacancy and income rates experienced in the surrounding markets. By keying in on these socio-economic trends, the company should be able to better determine the direction and strength of the market. It should be noted that household income trends that are very strong may indicate a move from apartment rentals to individual property ownership, which will ultimately negatively affect vacancy rates.