How Can Passive Investors Know They’re Investing in a Strong Market?

Updated: Mar 7

Passive investors who participate in multifamily syndications and invest with others often find that they’re investing with syndicators who purchase out-of-state properties. For example, I live in California, but I invest in properties that are located in Texas, Georgia and Florida. There are many reasons why I’ve chosen those states, including cost, market growth, and the fact that those markets are “landlord friendly” states.

It doesn’t matter if your multifamily deal is a five hour flight from where you’re located, it only matters that you are able to do due diligence on the market you plan to invest in. The problem faced by many passive investors is that they usually don’t have the time or expertise to investigate those markets.

I totally understand that dilemma, but I’ve found ways to gain information on the market, regardless of where it’s located. The bottom line is that you want to be sure you’re investing in a strong market.

Market Criteria: What Makes a Strong Market?

Before identifying the tools used to research an out-of-state market, I’d like to identify the criteria that define a strong real estate market. “Growth” is one of the keys, and it includes three types: population growth, job growth, and rent growth. You need to have all three on an upward trend to identify a market as “strong.”

Here’s why: if you have a lot of people moving into a market due to new job opportunities, but there is an abundance of multifamily properties, then rent growth will be stagnant and it would be hard to raise rents. That would limit your potential revenues and income, and the market wouldn’t be considered strong.

I mentioned that you want to invest in “landlord friendly” state, so let me explain. Many states have or are implementing rent control, which governs how much a landlord can legally increase rents at their properties. The last thing you want to happen is for someone to come in after you invest and place a cap on your ability to raise rents, regardless of the improvements made on the property.

Another problem comes into play when states limit a landlord’s ability to evict a tenant who doesn’t pay their rent. That could mean a lengthy and expensive legal battle in court to evict a non-paying tenant. Investing in states without rent control or laws that favor landlords over tenants are smart investments.

Another key criterion to look at is the potential appreciation of the property. That’s because the bulk of the profits on a multifamily property investment come when the property sells. I always search for markets where the property values are increasing, as the chance for an increase in value when the property sells is greater. Because real estate is cyclical, increasing values are no guarantee they’ll be increasing when the property is sold. However, it’s better to invest in a market where values are increasing than one where they’re not.

Tool #1 to Use: