Does This 4 Letter Word Scare You?

Long-distance investing is scary for people. They will buy a stock that they know little about, but they will shy away from buying real estate outside of their back yard. Why?

The answer is simple. Most investors don't know how to quantitatively assess a market.

When you live somewhere your qualitative reasoning helps you immensely in your investing. The qualities and characteristics of a city make it easy for you to make sense of your investment; and let's face it, investing locally is comfortable. As humans, we tend to want to control the things we don't understand - because it gives us certainty.

But does that make it better?

Investing simply because it's convenient or comfortable, is in my opinion a short-sided solution, to a long term problem. Don't worry, you are not alone. I used to feel the same way until I developed a method to quantitatively analyze a region.

What actually makes a good market?

Back in 2008, I was trading highly leveraged futures and commodities when the Dow Jones fell 777 points in a single day. As I watched my customers get completely obliterated, I realized that liquidity and leverage were a double edge sword.

In a bull market, everyone is a genius. But when things go sour how do you protect yourself - and this is what freaks people out..."The Unknown".

The trap of investing when things are good, is thinking that things will be good forever. Simply put, the best investors are comfortable talking about risk, because they understand all the risks. In other words, "risk" is all the things that you assume could go wrong, end up going wrong.

Risk is only a problem if you are not prepared.

There were a lot of very smart people who didn't see the 2008 housing loan crisis coming. Or should I say, they assumed that it would last forever? So if no one truly knows how to predict the economy, or privy to all the information; how do you protect your downside?

70% of your success in real estate comes down to the market where you decide to invest. This includes the city and the submarket in that specific city. Because things like schools, income, and violent crime determine the strength of the market long term and the durability of an asset during economic uncertainty.

This means that the core of risk management strategy in real estate is picking a great market.

We must come to terms with the fact that we can't predict the future or when, why, what, or how the economy will play out. But we can pick great dirt, in a great market, coupled with a great and durable asset.

How do you determine a good market?

1. Net migration (Total # of the net new population): This is my favorite metric. Its an indication of growth and often supported by job and income growth. If people are moving to a city, it means that they are leaving somewhere else.
2. Population Growth: The percentage or rate of growth per year. The goal here is consistency and growth at or above the national average. This metric is important because it is a comparison against other markets. It may have good growth but compared to other cities it's not nearly as strong.
3. Employment growth: plain and simple, jobs drive the economy. With jobs comes net migration.
4. Income Growth: More jobs + Population growth = Stronger Economy and inturn should indicate consistent income growth at or above the national average.
5. Submarket: 1.) Low Violent Crime: people will not generally move if someone breaks into their car, but violent crimes cause people to move. Your second biggest risk factor is your tenant base. 2.) Median income: This is helpful to determine if the market can support rent growth in the business plan. 3.) School Rating: People will move to and stay in an apartment to ensure their children can go to a good school.

Final Thoughts...

Risk is not something to be afraid of; in fact its quite the opposite. The key is knowing what risk factors to look for. What was laid out above is simply how we determine the strength of a market. But beyond the above, there are 17 other pieces of information that we consider when underwriting a deal to determine our approach and business plan.

Stay tuned for the next Monday Multifamily update, to learn which types of apartment assets we buy and why.

To learn more about investing in apartments, go www.thegrowthvue.com

Disclosure:

The article does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees, and expenses of a fund.

Private security transactions involve a high degree of risk and are not suitable for all investors. They are illiquid, may have a long hold period, and may result in the loss of invested principal.