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How to Find Outstanding Multifamily Investments in a Hot Real Estate Market

Red-hot real estate markets seem to compound on themselves. Once word gets out that a city is growing, it usually attracts more investment from out-of-town firms looking for higher returns than they have in their home markets. In Austin, where I live and invest, we’ve watched the multifamily market explode in the past decade—especially the last few years. The meteoric rise of Austin real estate has reliably brought all types of investors to our city. This makes for a rising tide but also creates a lot of competition for the best deals. Many are learning the hard way that, even in a market like this, not all real estate investments are made equal. 

I’ve spent many years in the trenches of real estate investment. I’ve seen how this works, and I’m painfully familiar with the traps waiting for multifamily investors. Real estate investments, especially recession-resilient asset classes like multifamily developments, can offer investors a reliable tax shelter and a steady vehicle for long-term wealth building. But even investments with a wider margin for error can go south, or at least fail to deliver the returns you want. 

I have a few methods for identifying great multifamily investments. Some are specific to Austin, some are not. Hopefully, you can apply the lessons I’ve learned from years in the real estate game to your own investment strategy.

Every investor and her cousin will go after stabilized properties in popular neighborhoods. It seems like the safe, obvious choice. In this market, how could such an investment go wrong? Investors probably won’t lose money on such an investment, but they won’t necessarily get a great return, either. As with any investment, it’s best to buy low. Savvy investors will use key data to identify properties and neighborhoods poised to grow rapidly.

I monitor demographic trends closely, using data analysis and visualization tools like heat maps to identify zones with high demand and impending supply. Population and housing growth are obvious metrics, so I look at deeper variables to complete the picture. First is job growth. Major corporations like Apple, Amazon, Facebook and Google are driving an employment boom in Austin. Also, a recent analysis by CommercialCafe ranks Austin as the best city in the U.S. for startups.

Most of these new employees are millennials, who by either choice or necessity lean towards apartment living. Where will they all live? Where are the undeveloped neighborhoods near major corporate campuses (existing and planned)? I want to get in on the ground floor, so I focus on areas that will soon be inundated with thousands of salaried, apartment-seeking workers. 

Next I look at median income growth. A worker influx doesn’t always equate with the income surge that market-price multifamily developments need to stay profitable. I look for median income in my target neighborhoods to scale with job growth. Without the wages to afford market prices, employees will likely seek affordable multifamily housing options. 

I also try to identify the neighborhoods that will soon attract the attention of well-salaried tenants fleeing spikes in downtown rent. These folks usually have plenty of income to afford market prices but no longer feel comfortable with the cost of living near the center of town. They might also move closer to work, better schools, or a more family-friendly environment. 

Another important thing to consider are transportation constraints. With a surge of new workers comes transportation challenges. Already congested by a rapidly growing population, Austin’s roadways are ill-prepared to absorb tens of thousands of transplants. This means people will look for housing close to freeways, park-and-ride hubs, and train stations. They’ll have to balance affordability with commute time. Where are existing transportation hubs? Where is the city planning to build new roads, tracks, and bike lanes?

When I lived in New York, the city opened the Second Avenue subway line with a new stop in a neighborhood called Yorkville. Seemingly overnight, the new line transformed Yorkville from a quiet, underdeveloped area into the hottest real estate in New York. Austin doesn’t have a subway, but it does have plenty of room for new roads, bike lanes, and train routes.  

Obviously, I am bullish on multifamily. But, I realize that investors can choose from thousands of investment vehicles be it other property types, stocks, futures, gold, hell even Bitcoin. Each investment class comes with both advantages and pitfalls. I prefer recession-resilient real estate investments like multifamily housing because they give me a reliable tax shelter and a great way to steadily build wealth.

Multifamily developments can offer relatively low risk, people need somewhere to live and increasingly they want to be in denser, “urban” areas with easy access to where they work and play. They also create a nice passive income stream and a nice depreciation income shelter on your taxes. With a buy and hold strategy, they can have the advantageous tax distinction of being long-term capital gains, and even if they are sold, they can still be eligible for capital gain deferment through reinvestment thanks to the 1031 exchange program, which allows an investor to defer capital gains by exchanging one property for another similar property. This technique can be used repeatedly to defer gains and can steadily build wealth over time as an investor graduates from smaller to larger properties.

With multifamily built into the core of my portfolio, I don’t worry when people start talking about the next negative market event. Even in a recession, tenants still need a place to live; they still pay rent.

Of course, multifamily investments come with their own set of risks. In many states, legislation can make it easy for tenants to sue apartment managers for property upkeep issues. Hurricanes and flooding can affect coastal apartment complexes while wildfires and windstorms can affect inland properties. Successful real estate investors can learn to overcome these risks by monitoring key metrics and carefully selecting properties with less exposure.

Austin is the fastest-growing major metro area in the United States. From 2009 to 2019, non-farm payroll jobs in the city grew from 784,900 to 1.1 million, a 29 percent growth rate, and are projected to increase by another 350,000 over the next two decades. Fifty-one percent of Austinites (yeah, that is what they are called) rent, and we have tens of thousands of millennial workers flooding in who will need places to live. 

I feel extremely fortunate to be where I am today—living, working, and investing in the middle of the action. This really is the time to be a multifamily investor, especially in Austin, where technology intersects with a booming urban culture. We’re seeing some incredible innovation in the world of real estate development, and I’ve never been more excited to see what the future brings. The opportunities just keep coming!

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