One of the main challenges when getting started with multifamily investing is where to look. With the market so hot, many investors are looking outside their own backyards in search of deals.

But where to look? How do you go about it?

This is not a small matter because wherever you choose means that’s where you’ll spend hours and days looking for deals, building teams and managing the property.

In this article I want to describe HOW to go about picking the best areas for multifamily deals and give you 3 resources to help you.

The methodology is to evaluate areas based on these 3 criteria.

Criteria #1: Look for Areas You Like

Start by picking an area you like (or at least wouldn’t mind spending time in). Maybe you have friends and family who live there, or maybe it’s just an area you like. Also consider the travel logistics. Is it a place you can reasonably drive or fly to? For example, I need to be able to fly to it with a direct flight in two hours or less.

Criteria #2: Look for “High-Yield” Areas

If you’re living on either coast (or even some areas in between), then you know that the multifamily market is red-hot. It will be more difficult to find good deals when others are willing to overpay.

That means you may have to look in less-hot cities or secondary markets that may be off the beaten path but offer higher yields.

“High-yield” areas are areas in which properties are valued for less relative to their income than other areas, i.e. their cash on cash returns are higher (as well as their cap rates).

Criteria #3: Look for “High-Growth” Areas

You want areas in which employment is growing. And ideally you want that source of employment to be as diversified as possible (to avoid what happened during the recession with areas that relied on only a few industries).

I want to be more specific about how to apply these criteria by using three very useful reports.

3 Reports To Help You Find the Right Area

Here are three free reports to help you to identify the markets to consider for deals.

Report #1: The Marcus & Millichap National Apartment Report

The Marcus & Millichap National Apartment Report is available here. The report ranks the top metropolitan areas in the country by these very important criteria:

  • Vacancy and rent rates trends,
  • Sales trends;,
  • Cap rate and yield, and
  • Employment growth.

Report #2: The IRR Viewpoint Report

Another useful report is the IRR Viewpoint report available here. This report plots major cities on the “Market Cycle” graph, i.e. from a “Recovery/Expansion” market to “Hypersupply” and back down to “Recession.” And it does this for multiple asset classes (i.e. multifamily, retail, office, etc.).

This visually plots the major markets on where they are in the “up-and-down” market cycle. It’s interesting that there are a couple of markets that are still in “recovery.” Surprisingly, there are also a good number of markets in growth and not-yet-hot markets (“Expanding”).

Ideally, you want to look for markets that are in the Recovery and Expansion cycles and avoid properties in the Hypersupply and Recession cycles.

Report #3: The Milken Best Performing Cities Report

The third useful report is the Milken Best Performing Cities Report, which ranks cities based on their job growth. It ranks 200 large cities and also 200 small cities and highlights the top cities with a more in-depth profile.

This allows you to see where your city ranks in the list and how it’s trending. If your city is towards the lower end of the list and declining, it might be a reason to be cautious with investing in that city. On the other hand, if your city is growing and the trend is positive, that might be a good reason to invest there.

Where to Start: Putting it All Together

This is a lot of information, and you might be completely overwhelmed by the thought of picking one area from many.

Why not start with the IRR Viewpoint report? Create a short list from the cities in the Recovery or Expansion Market Cycle. Then check out the Opportunity and High Octane Indeces in the Marcus & Millichap report. These indeces list the top 10 under-valued markets with the potential for high growth in the next years.

Cross-reference this list with the places you wouldn’t mind spending time, and you might have 3-5 cities on your short list. Then use the rest of the reports to drill down on each of these cities further and pick your top 3.

Conclusion

I think these three reports will help you to identify markets in which to look for deals. If you can couple solid job growth with an Expanding Market cycle and high cap rates, you have an ideal combination to look in that market.

However, keep in mind that real estate investing is still very local; just because a city has a low ranking in the Best Cities report doesn’t mean that one part of the city isn’t growing. And vice versa. So take these statistics with a grain of salt.

Nevertheless, this methodology and the combination of these 3 reports are a useful tool for narrowing down your geography for your next multifamily deal.

What areas do you think are good for apartment building investing right now?

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