How These Two Market Factors Will Make or Break Your Real Estate Business
In most markets across the United States, the apartment market is strong, which is great for multifamily syndicators like myself. However, what happens when the market takes the inevitable dip? How do we know that our properties will continue to cash flow?
A strong housing market can mask the weaknesses of inferior properties, but when the market weakens, those inferior properties will be the first to be negatively affected.
Peter DiSalvo, who has over 20 years of experience providing market research and has consulted on over 1,000 projects across 46 states, has a strong understanding of this phenomenon. In our recent conversation, he explained the two market related items you should analyze to ensure the long-term viability of your properties.
#1 – Location
The first thing to analyze is the location of your property, which can be broken down into five factors.
One area to analyze is the property traffic. “Ideally, you have an apartment that has visibility to a lot of traffic,” Peter explained. “If you’re not one of those that are getting 10,000 to 15,000 cars a day in front of you, that may mean you’re going to have to spend more dollars marketing for people to find your property.”
Luckily, you don’t have to sit outside of your apartment with a tally counter. Here are three sources Peter provided for finding the traffic information on your property:
- ESRI, a demographer
- Department of Transportation for the state
- City Municipality
Being hidden from traffic is a red flag and a sign of an inferior property.
Another location-related area to consider is your property’s accessibility. Peter said, “Good ingress, egress, how easy it is to get in and out of your property – that can play into it too.” For example, “if it’s a right out only, but you know that all the traffic goes left to go to work in the morning, that may be an issue.”
Also, see what is located next to your property. Does the surrounding real estate complement your properties demographic? For an extreme example, Peter said, “I recently saw an apartment development that was built near a strip club… The strip club would park their billboard sign next to the entrance. It was a family project where you had this enormous billboard sign of the next ladies that would be dancing there that night.” Other examples would be a storage facility, graveyard, construction site, landfill, or anything else that isn’t aesthetically pleasing or that isn’t contributing to the property’s demographic.
Depending on your demographic, the quality of school may be important. “Renters are having less kids, but I would say if you’re looking at a property that has a really heavy mix of three bedrooms, that’s when you really need to look into the schools,” Peter explained. “If the [public] schools aren’t particularly good, what are the private schools like? Sometimes that’s enough to negate that issue.”
Finally, if you want to attract the millennial generation, Peter said there are three location-based items to consider:
- Are they close to jobs?
- Do they have quick and easy access to highways?
- How close are retail opportunities?
If millennials are your target demographic, the answer to these three questions will be vital to your success.
#2 – Product
The second item, which is often overlooked, is the product. Peter said, “When I’m talking about product, there are multiple opportunities with this, but looking out for that functional obsolescence. If it’s something that can be remedied, there’s a big potential for rent increases… If not, it’s a big red flag. If the market has those hiccups, you may be the first to experience problems.”
One huge red flag is a galley kitchen. Peter defined galley kitchens as “essentially a closet with your appliances in it.” Open kitchens are in and galley kitchens are out. If it’s possible to open up a galley kitchen, that is a great value-add opportunity, but if it’s unconvertible, it’s a big red flag.
A compartmentalized floor plan is another form of functional obsolescence. Peter said these are floor plans “where there’s a hallway everywhere, and your unit feels like a lot of doors and hallways.” Similar to the kitchen, renters like open floor plans. If you have the ability to open up the floor plan, great. If not, that’s another red flag.
Access to closet space is another important factor. Lack of closet space, Peter said, “can create some high turnover once they get [in] and say ‘Well, I don’t have enough space to put my clothes.’ Without the storage stuff, you’re going to have high turnover in your property, and maybe even [be] difficult to rent.”
A final product-related red flag would be a sub-grade unit, or garden-level unit. Peter said, “those apartments that are partially underground, in a basement. Those are … the ones that you need to keep an eye out for. That’s a big red flag. Those are tough, no matter how you look at it. Even in good time those can be difficult to rent.”
To ensure continued success, even in down economy, it is vital to analyze the location and product prior to investing.
Peter said, “understanding that just because you have a site in a strong housing market doesn’t mean you have a great site. Make sure you have those [two] fundamental market characteristics is important to having a long-term viable project.”
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