Help with Market Research on Multifamily in Texas

17 Replies

Hey whats up guys! I am looking to invest in multifamily in Texas and am currently doing market research on different areas in the state, and I' m hoping you guys can help me narrow down my search. I am currently looking into Dallas Ft. Worth, San Antonio, Houston and Lubbock. Can you guys elaborate on the differences in these markets and how accessible they would be to a smaller out of state investor like myself. I am looking for something 20-50 units up to 2 million dollars. I am looking for both appreciation and cashflow and a value add opportunity. Thanks for the help!!

@Pablo Flores   these are certainty good and strong markets, keep in mined that these are also a handful of VERY competitive markets, infact one of the most competitive in the nation! 

Can I ask why did you choose these markets? 

And what level of returns are you expecting / hoping to achieve there? 

@Omar Khan is the man you want to talk to.

@Hadar Orkibi Well I had looked at other cities in Texas like Midland- Odessa but don’t like their dependence on oil. I also looked into Brownsville, but unemployment was too high and there isn’t much population growth. It seems like the cities I listed had the best metrics and could withstand the upcoming housing crunch more than others. I am looking into other Midwest marketa like Ohio and KC but i wanted to make this post just about Texas. I’m open to other suggestions if you have any though?!

I live in NY and invest passively in Dallas and Houston.  I also do a little on the GP side, but the biggest reason why is to have access to the better deals.  If you are not going to passively invest, but find a deal yourself, I haven't found a way without spending lots and lots of time in the markets.  Having a solid track record or partnering with someone who does is a must as well.

Hope that helps.

@Pablo Flores As @Holly Williams mentioned, you must have a strong presence in a market, aka "boots on the ground". This doesn't automatically translate into a partner, it could be your property manager or a team of people working for you. So it is possible to do, it will just take time to build this business. 

In terms of market research, in addition to evaluating the common factors such as job growth, population growth, accessibility, schools, crime, etc... you have to evaluate how will it fair when we have the next correction. Look at the historical rates and account for it when you're underwriting your deals in any market. 

Best!

@Pablo Flores , I agree with @Alina Trigub , you do not need a partner to be successful to buy out of state properties. It is about managing your team.  After I researched a city that would fair well in a correction, I sought out properties near hospitals.  The hospital's typically fair better no matter what happens in the economy. The hospital's employees need a place to live.

@Hadar Orkibi Thanks for the shout out. 

@Pablo Flores These are all great markets. They are also ultra competitive markets including Lubbock (which is oil-driven). 

You will be competing against deeper pockets and local investors with better relationships than a newer entrant. Not trying to scare you because these are amazing markets, just trying to present a clear picture. 

I would suggest developing your location relationships first. E.g. you might conclude Houston is your preferred market but if you can only develop relationships in Dallas/San Antonio then you SOL. 

Also, at the 20-50 unit level you will be competing with a ton of retail investors. At that level, it is less about intrinsic value and more about the emotional value folks attach. Which can lead to very interesting valuations. 

Happy to answer specific questions about each market.

@John Stoeber I'll be honest with you. I don't even look at the cap rate when doing analysis. I might refer to it but IMO, in isolation, it is a meaningless metric unless you're purchasing dozens of properties in a sub-market. 

I'm only concerned with rent upside, expense optimization, additional income sources and how much of the cap rate I can expand in the years that I own. 

My article on this topic: The Cap Rate Is Dead, Long Live the Cap Rate!

There is a ton of information littered in-between the sentences @Omar Khan is putting down. I would encourage everyone to sharpen the "real estate finance" saw in the toolbox by purchasing Peter Linneman's book 'Real Estate Finance & Investments: Risks and Opportunities'. The cap rate is not the holy grail because it applies to stabilized properties, only. 

@John Stoeber

You should be able get a range of market cap rates around DFW from local commercial brokers, CBRE, Costar, etc. If I had to guess - 5.5 to 7 for Class B and 7 to 8.5 for Class C. I do believe that market cap rates (i.e. cap rates of recently sold comparables) provide a feel for investors sentiment in how they value and assess risks associated with the properties in a certain market.

Cheers... Immanuel

Originally posted by @Larry Caper :

There is a ton of information littered in-between the sentences @Omar Khan is putting down. I would encourage everyone to sharpen the "real estate finance" saw in the toolbox by purchasing Peter Linneman's book 'Real Estate Finance & Investments: Risks and Opportunities'. The cap rate is not the holy grail because it applies to stabilized properties, only. 

The Peter Linneman book is a game changer! Great recommendation.

Thanks for all the great advice everyone! I have another questions thats off tangent. What do you guys think about buying 55+ multifamily retirement community? I found a property where everything else checks out. Rents are below market, expenses can be reduced, property is in good shape, area is good with lots of job and population growth. 

Originally posted by @Omar Khan :
Originally posted by @Larry Caper:

There is a ton of information littered in-between the sentences @Omar Khan is putting down. I would encourage everyone to sharpen the "real estate finance" saw in the toolbox by purchasing Peter Linneman's book 'Real Estate Finance & Investments: Risks and Opportunities'. The cap rate is not the holy grail because it applies to stabilized properties, only. 

The Peter Linneman book is a game changer! Great recommendation.

It's my understanding Cap Rates aren't a very useful metric when evaluating how much to purchase a value-add deal for, but aren't they useful in determining your reversion cap rate and your cash flow once the property is stabilized? As you say in the article multi-family assets are traded based off comps, but isn't the cap rate essentially a way to comp an income stream?

Originally posted by @John Stoeber :
Originally posted by @Omar Khan:
Originally posted by @Larry Caper:

There is a ton of information littered in-between the sentences @Omar Khan is putting down. I would encourage everyone to sharpen the "real estate finance" saw in the toolbox by purchasing Peter Linneman's book 'Real Estate Finance & Investments: Risks and Opportunities'. The cap rate is not the holy grail because it applies to stabilized properties, only. 

The Peter Linneman book is a game changer! Great recommendation.

It's my understanding Cap Rates aren't a very useful metric when evaluating how much to purchase a value-add deal for, but aren't they useful in determining your reversion cap rate and your cash flow once the property is stabilized? As you say in the article multi-family assets are traded based off comps, but isn't the cap rate essentially a way to comp an income stream?

The reversion cap rate would be based off the market cap because all pricing is market dependent. In other words, just because you opportunistically acquired, doesn’t mean you can opportunistically sell.

E.g. you can have a train wreck in DFW today and will get aggressive bids which are not aligned at all with how well the asset has historically performed.

Cap rate is used on stabilized properties not value-add. If a significant portion of your dataset is value-add or non-standardized (your property needs rehab but the other properties don’t), then you are comparing apples and oranges. 

This is just my opinion because there’s no exact science behind this and I don't have a crystal ball.

@Omar Khan exactly.  That's why I was asking for the cap rates on stabilized B & C assets because this would be the market cap rate.  Then you can model the reversion cap rate as market cap rate in year0 + 150 basis points = reversion cap rate.  

Also if you did decide to create a full blown DCF model would the cap rate on stabilized assets be viable as the discount rate, or is that still comparing apples to oranges?

@John Stoeber Every single sub-market has a different cap rate (not trying to be difficult, telling you the truth) that varies by property type, vintage, capex, etc. 

Adding 150bps to a a 1990s vintage will give you very different answers than applying a 150bps to a similar priced but better located asset that might be a 1980s vintage (location is key!). So the short answer is: Where are you buying? What are you buying? What are you comps? What story are you presenting?

IMO, discount rate and cap rate are two different things. The former takes into account your personal financing costs whereas the latter should be more market driven. E.g. TTM basis an asset could have say 6% cap rate, but the discount rate (or weight cost of capital) would greatly differ between Blackstone $200billion of assets) and us.