Determining Locations for Apt Purchase

[SteveO]

I had been recently asked about the process of determining locations for purchasing apartments. I might as well post it since I was putting it down in writing.

There is no need to make this process difficult or confusing. Start in a simple fashion and build from there as you learn. My actual process is part of my company and is confidential. But, I can outline the basics.

First, we need to understand why location is important. Most of the money that is made in apartment investing is done so through increasing the value. Cashflow is almost in the noise level. For more on this Please see the following link:

Apartment Appreciation Targeted

Small increments in income equate to considerably larger increases in value. The real question is how can you increase the income? There may be some opportunity with decreasing expenses to increase the bottom line and these should be evaluated. It is difficult to hang your hat on this as most owners are already very focused on controlling expenses. Sometimes to the detriment of income. My focus is typically on income.

If you can find an area that is increasing in rents and occupancy, the game is a lot easier. As long as you have good management in place and did a good job on the property evaluation, the income should increase through the improving market.

Job/population growth are key components to occupancy gains. Apartment construction is a subtractor. The typical scenario is that jobs come, households are created, vacancy lowers, rents increase, and then the builders start their thing.

All I simply look for is a temporary glitch in occupancy either from temporary job loss or overbuilding. If I can see the job prospects turning around, the area may be primed.

There are a number of other considerations. Some of the big ones are:

- Barriers to entry. (How easy is it to add units)
- Duration and magnitude of the job growth cycle
- Where the building is occurring
- Separation between cost of ownership vs renting

Be creative and come up with others.

 

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[Runum]

Great post. ++++speed

 

[Kung Fu Steve]

Sometimes I get off on a rant, but you understood exactly what I was asking.

Thanks a ton SteveO

 

[SteveO]

Anyone have any items to add?

 

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[andviv]

I think your post is very solid although generic. I understand that the real details are part of your company but I think that has been the recurring question asked here many times. The real "How". Probably that's why people can't comment more in this thread.

Another few thinks I look into:

- It should be one of the big metropolitan areas (Megapolitan areas)
- Mass transportation is a big plus, when available
- not too much concentration of jobs for one big, unique industry in the area (think Detroit, cars). I prefer some diversity in the city so not everything gets affected at once.

 

[AroundTheWorld]

Here is how I pick:

I follow SteveO around "Hey SteveO, got any projects coming up?" "Hey SteveO, is there still room for me?"

 

[RealOG]

Another thing I look for is diversity in economy. A large city where the job base is not completely tied to one industry (like the defense, technology, farming, manufacturing, etc.). The pros are you reduce the effect of a job meltdown, the cons are obviously diluting the ability to see massive job growth (which bring renters).

 

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[SteveO]

I think your post is very solid although generic. I understand that the real details are part of your company but I think that has been the recurring question asked here many times. The real "How". Probably that's why people can't comment more in this thread.

I actually did that on purpose. There is more to learn by generating thought and discussion. I have learned a lot by trying to come up with answers to questions which helps me as well.

Another few thinks I look into:

- It should be one of the big metropolitan areas (Megapolitan areas)
- Mass transportation is a big plus, when available
- not too much concentration of jobs for one big, unique industry in the area (think Detroit, cars). I prefer some diversity in the city so not everything gets affected at once.

The larger metro areas make is easier to sell as the larger companies tend to operate in them. There is usually more up and down activity. That doesn't mean that you should eliminate the smaller metros from your evaluation though.

Some renters are on a strict budget. Being on a transportation line is helpful. Finding a property that is on a proposed transportation line could generate more pop.

Diversity is good. But how well do you think you would have done if you bought on Detroit's upswing?

 

[SteveO]

Here is how I pick:

I follow SteveO around "Hey SteveO, got any projects coming up?" "Hey SteveO, is there still room for me?"

I see this as a vote of confidence.

 

[SteveO]

Another thing I look for is diversity in economy. A large city where the job base is not completely tied to one industry (like the defense, technology, farming, manufacturing, etc.). The pros are you reduce the effect of a job meltdown, the cons are obviously diluting the ability to see massive job growth (which bring renters).

Diversity helps with the risk as you have noted. High risk may mean higher rewards. Could also mean, "gulp", the potential to lose money.

 

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[Sid23]

How expensive is it to own a home?

NYC, SF Bay Area, LA, Miami, Seattle and other areas of extremely high home prices ensure a large supply of renters.

 

[SteveO]

How expensive is it to own a home?

NYC, SF Bay Area, LA, Miami, Seattle and other areas of extremely high home prices ensure a large supply of renters.

It also leads to higher rents. I certainly track the separation between cost of renting vs. home ownership.

 

[8 SNAKE]

What about the mix of people in a given area? In my opinion, I'd want populations with a lot of younger (20's) and older (retired) people because these two groups serve as your largest pool of renters. I'd also look for a high number of single people, because they're more likely to rent than married couples.

 

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[hakrjak]

In my area right now, I've noticed a lot of people in dancing banana suits standing on corners with signs that say things like "$99 Moves you in!" or "First month rent is $199" -- So I guess that is a bad sign to enter the apartment market here, huh? It's been that way for a couple years now, sadly...

Cheers,

- Hakrjak

 

[SteveO]

In my area right now, I've noticed a lot of people in dancing banana suits standing on corners with signs that say things like "$99 Moves you in!" or "First month rent is $199" -- So I guess that is a bad sign to enter the apartment market here, huh? It's been that way for a couple years now, sadly...

Cheers,

- Hakrjak

That is the TIME!!!! What is the vacancy rate now? What was it last year? What has/is going on with job growth?

Buy when the market is soft and the future vacancy direction is strong!!!

 

[AroundTheWorld]

ding. ding. ding. Do we have a winner, Johnnie?

Hey SteveO - ya going to Colorado Springs next ?

It is funny... after reading the Vollucci book on apartments, we were taking a road trip from Montana to Oregon. We drive through the tri-cities along the way. We picked up the paper and saw all kinds of move in specials. Hmmmm... we thought.

The following month we got the vollucci newsletter, and there were the tri-cities listed.

It was fun to identify the market - then have it "validated" by the newsletter. Of course, that is the closest we have ever come to market analysis in the apartment world - but it was fun while it lasted.

 

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[hakrjak]

That is the TIME!!!! What is the vacancy rate now? What was it last year? What has/is going on with job growth?

Buy when the market is soft and the future vacancy direction is strong!!!

Hey Steve -- I thought your strategy was to find mis-managed properties, and turn them around with good management. How do you fight a slow market? Do you just wait it out?

I guess here in Colorado Springs, we'll benefit as soon as the Iraq war is over. Most of the soldiers, even the ones who had families gave up their homes when they got deployed. Sent wives & kids to live with parents, etc. The newspaper has been talking about a rental shortage when they all return, but I'm just not sure I believe that since I remember some slowness in apartments here even before the wars broke out. Only time apartments started to really pick up here was 1998-2002 when the tech boom was on, and Colorado Springs was booming with tech jobs. Now that the city council has completely BLOWN it with HP and INTEL -- most of the tech jobs in our "Garden of the Gods" tech corridor have dissapeared.

Cheers,
- Hakrjak

 

[RealOG]

Colorado Springs? That's where I grew up. I actually tried to buy a building in the downtown area from a mini-REIT. If you remember, the guy approached me to sell but then pulled back and stopped returning my calls.

Negotiating with Egocentric Old Dogs

So weird, but the guy was pretty high on himself and probably didnt want some young punk being successful where he couldn't be. Will sit back and let him lose money on this building until the financial pain is stronger than his ego...

RealOG

 

[andviv]

While reading about economic news, try to identify where the largest employers are re-locating. If you notice that many of them are moving to the same area then it may be an indicator of strong economic upswing in the area (every new white-collar job generates three more jobs, if I recall correctly, but I don't have the source of this).

 

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[andviv]

Now that the city council has completely BLOWN it with HP and INTEL -- most of the tech jobs in our "Garden of the Gods" tech corridor have dissapeared.

So, where did these big employers relocated to? Those jobs probably went somewhere else.. where is that?

 

[8 SNAKE]

How do you fight a slow market? Do you just wait it out?

I'm not nearly as informed as Steve, but from I have learned you try to buy toward the end of a down-swing (though that's hard to time perfectly). You're counting on future employment to drive the demand for rental units up, thus increasing your revenue and value. You ride the wave for a while, and then cash out when you see current values approach replacement costs.

If you can find a property that can be cosmetically rehabbed and/or is being poorly managed, that's even better.

 

[Kung Fu Steve]

So, where did these big employers relocated to? Those jobs probably went somewhere else.. where is that?

India! Or at least it seems so from the last time I dealt with HP over the phone. :smxB:

8 SNAKE: I was just going to write the same thing.

Two questions I have for everyone then:

One has already been asked: How do you handle the property when it is struggling? Continue to send guys in banana suits to offer the $99 special?

The second one is what kind of exit strategies are availible in the case you are wrong?

 

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[RealOG]

So, where did these big employers relocated to? Those jobs probably went somewhere else.. where is that?

One of two places:

1. Asia
2. Other vacant manufacturing plants

Those factories were building old tecnnology and the demand wasnt there to support them. They are for sale now (at least the Intel plant is).

RealOG

 

[hakrjak]

So, where did these big employers relocated to? Those jobs probably went somewhere else.. where is that?

Uh -- Chennai and Bangalore India....

Ya, maybe it's time to start investing shanties and cardboard villages. :fryingpan::smash::great:

- Hakrjak

 

[hakrjak]

India! Or at least it seems so from the last time I dealt with HP over the phone. :smxB:

8 SNAKE: I was just going to write the same thing.

Two questions I have for everyone then:

One has already been asked: How do you handle the property when it is struggling? Continue to send guys in banana suits to offer the $99 special?

The second one is what kind of exit strategies are availible in the case you are wrong?

I'm looking forward to Steve's reply on this ? also... I think the answer is that you continue to lose money until things turn around? I don't have multi-unit experience, but from what I have observed -- I don't think all the guys in banana suits and all the $100 move in specials are going to get you to 100% occupancy if the market is slow for apartments in your area.

In my area, you can rent an SFR for about the same price as an average 2 bedroom apartment, so I think that has a lot to do with it. It's that Apartment vs. Ownership vs. SFR rental price spread Steve has elluded to in the past. It's got to be pretty wide to guarentee you big profits in multi-units, right?

- Hakrjak

 

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[SteveO]

Why would you hire banana suits when you have them right here on the forum? :banana::banana::banana::banana::banana:

Why would you pay for a property that is losing money? Wouldn't you pay the market based on the financials? That is the point of buying in a soft market.

If you can buy at a 7-9% cap rate and manage the property correctly, all you would need to do is wait out the market until your forecast proves itself.

Your risks:

- Inability to manage the property as well as the last owner.
- Job/population growth doesn't happen or goes the wrong way.
- You do a bad job on the due diligence
- Developers start the development thing

Well, developers will start building when the financials start looking stonger. Remember that part of your initial observations were that the number of permits should have had a drop-off due to overbuilding. If they start building heavily, it is time to sell.

There is a point where sellers will hold to a minimum price/unit because they have memories. In this case, you need to let the soft market work a while longer. It will come back to a cap rate. I have said in other posts that I buy properties that are losing money. These are mismanaged though. Mismanaged and in a soft market equals potential for a great deal. You really need to know what you are doing to use this approach. In these cases, the low cost/unit will attract buyers.

 

[SteveO]

I'm not nearly as informed as Steve, but from I have learned you try to buy toward the end of a down-swing (though that's hard to time perfectly). You're counting on future employment to drive the demand for rental units up, thus increasing your revenue and value. You ride the wave for a while, and then cash out when you see current values approach replacement costs.

Your timing does not need to be perfect. The closer the better but, as long as you are cashflowing, you have time to be patient. Monitor, monitor, monitor.

 

[SteveO]

One has already been asked: How do you handle the property when it is struggling? Continue to send guys in banana suits to offer the $99 special?

Use whatever process is working.

The second one is what kind of exit strategies are availible in the case you are wrong?

This is the tough one. Try not to be wrong to start with. If you are, you need to be able to make a decision on whether to cut your losses or hang on for the market to rebound. Obviously, the you don't want to lose the property to foreclosure. The ability to hunker down and see how long you can hang on will be an important part of the ongoing analysis. Many things can happen that are out of your control. You never know when the national economy or some stupid legislation will take a hack at you.

 

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[JesseO]

The great thing about Phoenix, AZ and other cities (some very far from the border) is that there are renters who are stuck around the $1,200 range. That means that there are those looking for lower rates so they can supply their children with clothes, get upgrades on their car(s), or generally try to save money for a better life. There's always going to be lower income. The best trick (for our rental rates) is to get those with a small family, who support themselves, and want a nice quiet place to live. The honest trick is to stick with those who NEED to rent when dealing with commercial RE properties. Cater to them, work FOR them, and make them happy. In turn, they will appreciate your business and make you rich.

Note: This is purely a management perspective. However, if you want to own, you also have to manage in one way or another.

 

[Kung Fu Steve]

This is the tough one. Try not to be wrong to start with.

Ha I love it