MultiFamily Areas to Buy – And Avoid – In Today’s Turbulent Market
In today’s turbulent markets, lots of people are speculating about where to buy-- or perhaps most importantly where not to buy. This analysis is mostly performed for the residential markets because of the gluttony of inventory and the high volume of press that the housing bubble receives – but those in the multifamily industry are trying to determine the same things.
Down payment requirements and loan terms, unlike residential properties, have not improved much for the multifamily borrower. In fact many banks are now requiring higher down payments than ever before, with units that have 4 or more residences requiring 30% or more down and 12 months or more of reserves to cover payments, taxes and insurance. Banks that used to assume a 75% occupancy rate often now assume as low as 60% to cover their proverbial behinds.
Given the restrictions and skin in the game the multifamily investor has in today’s market, analysis is even more vital than it was in the past. As an analyst, I am often asked where I would buy - and most importantly – why. Doing work in the media and calling an area “a wait and see” or a “bad buy” leads to hundreds of hate emails, letters to producers at networks and outcries by those in local markets. I experienced this most recently in the Ft.Myers, Florida area when speaking out against purchasing homes there.
The criteria I use when analyzing which markets I would go into are fairly simple. They focus on:
Jobs – are they moving in, or out?
Humans – are they moving in, or out?
Unemployment trends in the area (6 to 10 mile radius)
Type of jobs (healthcare would worry me, education doesn’t)
How stable prices have been in the past 90 to 180 days
Inventory on the market.
So given these criteria, I have a few places and recommendations for the residential or multihousing investor.
We know that high tech companies are moving into two areas: Omaha, Nebraska and Austin, Texas. In the interest of full disclosure, I own homes in Austin and Round Rock Texas – but I would continue to invest there if the down payment requirements weren’t so high. Median home prices have remained stable in Omaha, and are increasing in Austin. According to a Business Week article from June of 2009, Austin is seeing a lot of transplants from Los Angeles, San Francisco and New York City; partly people looking for work. The median price in Austin this time in 2008 was about $182,000; today it is $191,000. Austin grew about 4% in the past year while most markets declined. Texas tax structure is attracting big tech businesses like Sun MicroSystems.
Seattle, Washington hits my sixth point on the list above – inventory. Seattle had very strict building restrictions that did not allow significant overbuilding. As a result, while the rest of the market has an average of over 10 months of inventory, there is roughly 5 months inventory in Seattle. Many young people are “trying before they buy”, leading to a strong multihousing market. Prices have dropped a bit but appear by some indices to be leveling off.
Another interesting market? Salt Lake City, Utah. I haven’t been overly thrilled with numerous visits to the area partly due to the city seeming to shut down shortly after the sun does. But young people are moving there in droves – and it’s one of the fastest growing metro areas in the US. Prices are remaining stable over a six month period, so people are moving in and price stability seems to be setting in.
Nashville, Tennessee (I happen to be writing this story on the way to Nashville) also has a unique growth story. Nashville has one of the largest Kurdish populations outside of the Middle East (Business Week, 2009) and in the Muslim faith; persons are not allowed to pay interest on a home. Many turn to Habitat for Humanity which requires only principle payments on homes.
So what about places to avoid? I don’t like area where boomers are moving out of. Colorado and Idaho are two states that they’re moving from. I don’t recommend investing in areas with high foreclosure numbers unless you can get an amazing deal allowing for another 20% or more in price declines. As a result, I recommend doing a triple-take in the Riverside/San Bernardino markets in Southern California (referred to as the Inland Empire), and I would not jump into markets like Sacramento, Merced (which has seen up to 70% price declines since the beginning of the bubble burst; median of $230,000 in 2007 and $144,000 in 2008 for instance), Stockton, Ft. Myers, FL or Las Vegas, NV. Merced suffered from significant overbuilding. When the University of California system announced a new UC Merced, builders overestimated the size of the school and number of employees. It will take significant job growth to reduce the size of inventory there.
Today’s investment market is rocky, but this is the time I believe that we see about every decade to invest. Continuing this discussion on my website at The Babb Group, www.thebabbgroup.com, Forums/Real Estate.
