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 “value play†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 Trends
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 Trends
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.
Building Cycles
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 “bottom†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.
Socio-Economic Trends
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.
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jason, I am looking at a market with approximately 60,000 population that has over $1,000,000,000 in committed federal spending for new office campus and 15,000 employees. Build out is 6 years and estimated construction employment during build out is over 30,000. This is a very rough area with high crime rates, lots of tenants and subsidized housing (also rent controls) and vacant buildings etc. Our initial thought is to build some online properties to report on the area and its development for use as lead gen mostly for retail buyers and investors trying to learn more about the area.
Our cash flow is anticipated to be from RE commission, wholesaling/consulting, and rehab and flip and a few buy and holds.
I am trying to balance out traditional investor criteria for current cash flow in our deal criteria (which is very tough given rental market) with the most likely impact of higher rents and sales prices as ground gets broken and the area responds to the huge increase in jobs and investment in the area. I am assuming enough other investors, especially less experience ones, will also be swayed more by the opportunity for appreciation vs the current cash flow and higher management requirements.
It is my expectation that wholesaling and incrementally repackaging of properties will be our primary activity and source of cash flow and we will pick a few of the best opportunities for a long term hold. Given the rent control requirements I am leaning towards a “nightly rental” type investment where we can avoid rent controls.
sorta feels like make the “big time where you are” vs packing up and going someplace like Az./Midwest/Fl/Atlanta where it appears you can find 2%-50% type of deals which are tough in our market.
your thoughts would be helpful, but your sharing your experiences at 123flip.com is a tremendous benefit.
thanks
jeffrey
Well said. Have you created a system for analyzing this data in your business or do you rely on a gut feel after obsorbing the information listed above?