Real Estate Deal Analysis & Advice

How to Choose the Best Areas for Multifamily Deals With Confidence

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
multifamily-markets

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.

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

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.

Related: The Simple Way to Gain Experience For Multifamily Investing Without Buying Single Family Homes

“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.

Related: 6 Reasons to LOVE Multifamily Investments Over Single Family Homes

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?

Leave your comments below!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    Russell Brazil Real Estate Agent from Rockville, MD
    Replied almost 4 years ago
    Follow the path of gentrification.
    Ayodeji Kuponiyi Investor from King of Prussia, Pennsylvania
    Replied almost 4 years ago
    great article! Thanks for sharing the 3 links. Very helpful
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied almost 4 years ago
    Thanks!
    Brad Boone Real Estate Agent from Otsego, Michigan
    Replied almost 4 years ago
    Wow!!! ton of info thanks Michael
    Jessica Swingle from Springfield, Ohio
    Replied almost 4 years ago
    Excellent article. Learning how to read stats/data is critical for new investors (as tracking trends is important for ALL investors). I feel there is often not enough emphasis placed on this ~ thank you for sharing specific resources. I believe many people will find these helpful.
    Kirkland Lindsay from Elmont, New York
    Replied almost 4 years ago
    Great content, a concise article and absolutely worthwhile resources.
    Ben Staples Investor from Malden, MA
    Replied almost 4 years ago
    Incredible and extremely well timed article for my personal search status. Thanks so much for writing.
    Rahul Singhal Software Entrepreneur from Chicago, Illinois
    Replied almost 4 years ago
    This is incredible information! How do you know where you are or where you’re going without a map?
    Joseph Q. Real Estate Investor from San Diego, California
    Replied almost 4 years ago
    This is great information in addition to what I can find on the BLS, and easier to search!
    Jamane Y. from Greensboro, North Carolina
    Replied over 3 years ago
    Thank you for sharing
    Carole G. Investor from Durango, Colorado
    Replied over 3 years ago
    The link to the Best Performing Cities report at Milken took me to their main page, but I couldn’t find this report. Do you have a better link? Or topic words to search? Multifamily and housing didn’t bring it up.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied over 3 years ago
    Hi Carole – just google “Best Performing Cities report Milken” and the 2015 PDF should come up as the first search result. HOpe that helps!
    Ron Garrett from New York City, New York
    Replied over 3 years ago
    Thanks for writing this post and providing us with your framework / resources. I live in Manhattan and have been gearing up to start investing but I didn’t have a good grasp on how to find a good starting market for multi-family. I’ll be sure to read through your other posts.
    Brian Richards Investor from Sacramento, California
    Replied over 3 years ago
    Excellent article. I’ve used Marcus and Millichap over the years, and found them to be reliable. As far as hot markets goes, multifamily is ridiculously over priced here in N. California. I’ve seen cap rates as low as 2 1/2. People are either desperate or crazy to pay these prices. And worse, quality of life, with packed freeways and smog is deteriorating. Personally, I am looking in some of the smaller cities East of Texas.
    Shane Wood from Morrilton, Arkansas
    Replied over 2 years ago
    Extremely valuable information. Thank you Mr. Blank for being dedicated to helping others achieve their financial goals.