How to measure the supply/demand for rentals in your metro area?

[Jeff Benson]

BP Members,

I'm new to the multi-family/apt area of RE and I've spent some time analyzing my metro area (and we are thinking of moving to another major metro area-that's another story).  However, I've found a wide range of potential opportunities, but I'm not sure how to narrow down the best area.  I'm looking to understand how to measure the supply vs demand of rental units.  Maybe this simple example will help.

In Suburb #1, I found 10 multi-fam units with good cash flow ($100/door). Lower initial investment.

In Suburb #2, I find only 1-2 MF units with better cash flow ($175/door).  Double the initial investment of #1.

How do I know if Sub#1 has a declining demand for rentals?  Or does Sub#2 have high demand rentals?  How is supply vs demand measure in the rental market (and thus helps to establish the market rent?)?

Regards,

Jeff

[Neil Schoepp]

@Jeff Benson

When investigating new markets I look for things like

population growth (upward over the last 10 years)

Job growth 1% or greater

Unemployment =< national average

per cap income 20K

Household income 3 times annual rent

number of households (in comparison to other markets)

Favorable government policies (is the local government looking to attract business)

Those numbers will give me a sense of the macro market. Then I look for the micro

Crime states (block by block) <national avg. I know what my neighbor hood is and compare it to that.

School ratings B

proximity to amenities (walmart/home depot/ chic-fil-a)

When they all check out it's time to get feet on the ground. Either yours or someone you can trust. There are things you can only find out by being in the area. Which schools are the best ones with in the district. What side of the tracks / hwy / river do you want to live on? Some areas are block by block. Does it flood during heavy prolong rain. Are you in a flight path. All sorts of things that aren't online. 

To directly answer your question and using the assumption that you did your macro mkt analysis. I would do a micro on each one and find out what is causing the difference. Is it class of property, class of neighborhood, class of tenants, amenities, proximity to highways or transit. Individual school rating within a great overall district. Once you know the cause you can then decide where you are most comfortable investing. Typically speaking the lower the class the better the cash flow but also the potential for bigger headaches. So you have to find your own personal balance.

Demand in the market is created by population growth and population growth is created by job growth, job growth is created by business friendly government.