Identifying the top performing housing markets for investment

Jim Hamilton

There are over 71,000 residential properties with over 100 units in the US. How can an investor narrow these tremendous investment opportunities to markets where they would have the highest likelihood of achieving their desired investment returns?

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

We are initially concentrating on the western and south western markets within a three hour flight of our home base. Furthermore, we believe that our team can only achieve real expertise in five to ten markets at a time. This ensures our investors that we have the knowledge and competitive advantage to compete and outperform local investors in the region.

Within our geographic reach, we identify markets that exhibit long-term supply/demand conditions that will result in higher rental growth and occupancy over time.

Check the future housing offer

A metropolitan area with projected future supply that may not keep pace with projected demand is ideal for those looking to invest in existing multi-family homes and develop new assets. We consider the projected number of new units shipped as a percentage of inventory on hand. Within each market we seek locations where new supply may be limited by a lack of available land, zoning regulations or higher costs to build new units.

Determine demand and affordability

There are no better indicators of future demand for housing than population and employment growth. The locations in which we invest have all seen growth of over 10 per cent in new homes over the last 10 years and are expected to continue to outgrow the rest of the country in the future. In almost all cases, the main driver of growth in these markets has been job creation. Markets that attract a diverse base of economically resilient jobs with reasonable wage levels produce a disproportionate share of qualified tenants.

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

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

Study rent regulations

In addition to data analysis, which shows us markets that offer the highest potential for investment opportunities, we also assess a market’s political and regulatory environment. Lower taxes and a favorable regulatory environment give us confidence that the area can continue to attract business, create jobs and ultimately lead to new immigration to the region.

Equally important is the legal environment of a store. Areas with local or regional growth and/or development limits are evaluated positively as future competitive supply may be limited. Conversely, areas with 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 such as 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 sub-markets and neighborhoods that best fit our investment profile. This knowledge is only achievable by becoming local market experts. Building relationships with successful brokerage professionals and property managers in the area is vital. You can provide the micro-data you need to make informed decisions and ultimately close deals, and then effectively manage your properties.

The market for apartment buildings continues to attract strong investor interest. With careful top-down analysis and some strategic relationships, investors can still identify the best deals that deliver strong risk-adjusted returns and avoid critical mistakes.

Jim Hamilton is vice president of acquisitions at Brixton Capital, a private real estate investment firm targeting multifamily, retail, land and other real estate types.

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