How to identify the best performing investment markets

Jim Hamilton

In the United States, there are over 71,000 apartment properties with over 100 units. How can an investor limit this huge investment opportunity to markets where he would have the greatest likelihood of achieving his target investment returns?

Decades of experience across many economic cycles have enabled our team at Brixton Capital to offer advice.

We start by focusing on the West and South West markets, less than a three hour flight from our home port. Moreover, we believe that our team can only acquire real expertise in five to ten markets at a time. This assures our investors that we have the knowledge and competitive advantage to compete and outperform local investors in the region.

Within our geographic scope, we identify markets that exhibit long-term supply and demand conditions that will lead to higher rental growth and higher occupancy over time.

Check the future supply of apartments

A metropolitan area whose projected future supply does not match projected demand is ideal for those looking to invest in existing multi-family properties as well as developing new assets. We view the expected number of new units shipped as a percentage of existing inventory. Within each market, we look for locations where new supply may be limited by a lack of available land, zoning regulations or a higher cost to build new units.

Determine demand and affordability

There are no better indicators of future housing demand than population and employment growth. The locations we invest in have all experienced more than 10% growth in new households over the past 10 years and are expected to continue to outpace the rest of the country in growth going forward. In almost all cases, the main driver of growth in these markets has been the addition of new jobs. Markets that attract a diverse base of economically resilient jobs with favorable wage levels produce a disproportionate share of skilled tenants.

Affordability is key to our demand assessment. We target markets where rents represent less than 25% of the region’s income. This ensures that our tenants can meet their rental obligations. If an investor executes a value-added business plan, the new, higher rent will still be affordable for the typical essential worker (nurses, teachers, police officers, construction workers, office administration, manufacturing, etc.).

Similarly, we assess the difference between the cost of renting and the cost of buying a house. Rising house prices and mortgage rates have made home ownership too expensive for many middle-class people. A market where there is a significant gap between rents and home ownership (mortgage payment, property taxes and insurance) is a good indicator that rental demand will remain strong.

Regulations on study rents

Along with analyzing the data that directs us to the markets that offer the greatest potential for investment opportunities, we also assess the political and regulatory environment of a market. Lower taxes and a supportive regulatory environment give us confidence that the region can continue to attract business, create jobs and ultimately drive further migration to the region.

Equally important is the housing regulatory environment of a market. Areas with local or regional growth and/or development limits are viewed favorably as there may be a limit to future competitive supply. Conversely, areas subject to rent control regulations can negatively impact an investor’s returns.

Filter by submarket and neighborhood

This top-down analysis has led our company to invest in markets like Dallas, Houston, Austin, San Antonio, Seattle, Phoenix and Salt Lake City. Within each of these markets, we apply a finer filter to determine the specific submarkets and neighborhoods that best match our investment profile. This knowledge is only possible by becoming experts in the local market. Building relationships with successful brokerage professionals and property managers in the area is essential. They can provide the microdata you need to make informed decisions and ultimately execute transactions and then effectively manage your properties.

The multifamily market continues to attract strong investor interest. Through careful top-down analysis and certain strategic relationships, investors can always identify the best trades that generate strong risk-adjusted returns and avoid making critical mistakes.

Jim Hamilton is Vice President of Acquisitions for Brixton Capital, a private real estate investment firm that targets multifamily, commercial, land and other property types.