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I had been recently asked about the process of determining locations for purchasing apartments. I might as well post it since I was putting it down in writing.
There is no need to make this process difficult or confusing. Start in a simple fashion and build from there as you learn. My actual process is part of my company and is confidential. But, I can outline the basics.
First, we need to understand why location is important. Most of the money that is made in apartment investing is done so through increasing the value. Cashflow is almost in the noise level. For more on this Please see the following link:
Apartment Appreciation Targeted
Small increments in income equate to considerably larger increases in value. The real question is how can you increase the income? There may be some opportunity with decreasing expenses to increase the bottom line and these should be evaluated. It is difficult to hang your hat on this as most owners are already very focused on controlling expenses. Sometimes to the detriment of income. My focus is typically on income.
If you can find an area that is increasing in rents and occupancy, the game is a lot easier. As long as you have good management in place and did a good job on the property evaluation, the income should increase through the improving market.
Job/population growth are key components to occupancy gains. Apartment construction is a subtractor. The typical scenario is that jobs come, households are created, vacancy lowers, rents increase, and then the builders start their thing.
All I simply look for is a temporary glitch in occupancy either from temporary job loss or overbuilding. If I can see the job prospects turning around, the area may be primed.
There are a number of other considerations. Some of the big ones are:
- Barriers to entry. (How easy is it to add units)
- Duration and magnitude of the job growth cycle
- Where the building is occurring
- Separation between cost of ownership vs renting
Be creative and come up with others.
There is no need to make this process difficult or confusing. Start in a simple fashion and build from there as you learn. My actual process is part of my company and is confidential. But, I can outline the basics.
First, we need to understand why location is important. Most of the money that is made in apartment investing is done so through increasing the value. Cashflow is almost in the noise level. For more on this Please see the following link:
Apartment Appreciation Targeted
Small increments in income equate to considerably larger increases in value. The real question is how can you increase the income? There may be some opportunity with decreasing expenses to increase the bottom line and these should be evaluated. It is difficult to hang your hat on this as most owners are already very focused on controlling expenses. Sometimes to the detriment of income. My focus is typically on income.
If you can find an area that is increasing in rents and occupancy, the game is a lot easier. As long as you have good management in place and did a good job on the property evaluation, the income should increase through the improving market.
Job/population growth are key components to occupancy gains. Apartment construction is a subtractor. The typical scenario is that jobs come, households are created, vacancy lowers, rents increase, and then the builders start their thing.
All I simply look for is a temporary glitch in occupancy either from temporary job loss or overbuilding. If I can see the job prospects turning around, the area may be primed.
There are a number of other considerations. Some of the big ones are:
- Barriers to entry. (How easy is it to add units)
- Duration and magnitude of the job growth cycle
- Where the building is occurring
- Separation between cost of ownership vs renting
Be creative and come up with others.
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