Best/Worst Markets for Build-to-Rent

build-to-rent market research market updates multifamily new build new construction Aug 30, 2021

Best/Worst Markets for Build-to-Rent Investing

We have time to get into another question. What markets should you consider for build-to-rent? Is there a right answer?

Chase Leavitt
There's a lot of great options in my opinion. The more you do your homework and understand each market, there's a lot of opportunities. I would say pick where you feel comfortable.

For me, I started here in Utah, and luckily, Utah's a hot market. But that's where I first started because it was in my backyard. The more I started to research Idaho, Arizona, and Texas the more I saw a lot of similarities to my home market. And with that, a lot of opportunities. A good place to start is where you feel comfortable.

Sherida Zenger
I think you also want to be aware of how landlord-friendly a place would be. If you're going to be a landlord, you want some protection on your side.

Steve Olson
There are definitely states you want to avoid. Want to pick on states?

Massachusetts, New York, California, Washington, Oregon, Connecticut, Maryland. I'm not saying you can't make money in these states (and there are more states we won't get into), but they're not known to be very landlord-friendly.

When we talk about to build for rent, it's the local building code and the inspections and everything that you have to deal with.

If I said those states and you're, you're sitting there going, Hey, that's mean. You actually know it's true if you live in one of those cities, and you own property.

Now, it doesn't mean that you can't make money, it actually doesn't mean that you can't make a lot of money. There's that saying in business that if it were easy, everybody would do it. Right? And so if it were, so people want to live in those places, is their tenant demand? Right? I think that's the ultimate key. Yep.

Do people want to pay rent is rent going up, you can usually figure things out from there, it might be harder, and it will pick on Massachusetts, it might be more difficult. That doesn't mean it's not possible. And it doesn't mean it's not profitable. But what you said for somebody who maybe is going to go outside of their backyard, because I agree, it's easy to know and operate in your own backyard.

But if you're going to go outside of it, it probably makes sense to be somewhere that's landlord-friendly, and, and has some of those laws on the books that are more favorable. Because when you're doing it from afar, you need everything in your favor that you can possibly get.

Chase Leavitt
One more thing about the backyard comments. There are certain cities and places in my home market of Utah, I wouldn't go to. So it could be very specific within that state as well.

Steve Olson
Well, you do. You're the majority of your investing in Utah. So why wouldn't you go to those places?

Chase Leavitt
Just like what you mentioned, the man for rentals or for and also employment rates as well as their high employment rates? And what are the vacancy rates going to be? Those are two key indicators that I look for, that you'll want to study in each market that is specific.

Steve Olson
So the three of us once upon a time, when was this when we took our trip to Texas, remember that? Did we look at duplexes? Yeah, that's like six months ago, yeah, beginning of the year. I know in the COVID era, nobody knows when things happened. I can't remember it's all a blur.

We saw some good-looking products, some of it in the core of San Antonio. And the rest kind of out in what I felt like was the sticks. And I know some investors that have purchased there. They seem happy. And but the jury is still out. Right? When things are going good things are going good. Right? You can invest almost anywhere and look like a genius. But when things aren't going so good. You find out what you really have. And that's what I want to see.

With those particular duplexes that we saw that were out in the middle of nowhere. I kept thinking, well, who are these people who are clamoring to pay rent out here?

Sherida Zenger
Where do they work? What are they doing? Yeah, right. There's a lot of questions behind that. How far are they willing to commute? I mean, there's, yeah, there are things that play into that. Right. Are they willing to commute a little more, because the rents are less? Yeah. But is that something you want to take on risk-wise?

Steve Olson
Yeah, well, and it's exactly why are they willing to do it and the developer had their reasons. Some of them made sense. Others I had issues with, we're not going to know. Now you might be a really careful investor, you might say, Well, I'm not investing there then because I don't want the jury to be out.

I want to invest in an urban core, where I know no matter what, there's going to be a huge likelihood that there will always be tenants. There will always be businesses, and that's great, but it comes with a cost doesn't it. You want that certitude with tenants. It's going to cost you cheap. Land out in the middle of nowhere, anytime.

Chase Leavitt
So there are two questions involved there. Yeah, like what you said, Will it rent? And most of the time, it's Yes. Unless it's in the middle of nowhere. But that will probably rent too. The next question is how much is it going to rent for? Once you understand those two things, then you can pencil in the numbers and see what are the cap rates going to be cash flow and see if it makes sense or not?

Steve Olson
Everything rents at a price. But is that price going to eat you alive? Exactly right in the build for rent world, your financing, and all of your projections are based on a certain rental price. So you've got to have some elasticity at that price, you've got to know hey, look, I've seen units running for $1200 a month.

That seems like that's very easy to do around here. But I'm going to hit the market with 50 of these that are kind of a similar floor plan. Maybe I should plan on like, you know, a $1,000 rent special for the first year and build all my models off of that. Because if you outperform it, then good for you. But if the project success lives or dies by you having to hit that in the first year, this is not the right deal for you. I don't think

Sherida Zenger
When I think that's why when we're analyzing projects, putting a performance together, we're looking at it saying, What's a conservative viewpoint, right?

Like we want to be conservative, we're not projecting market rents that are going to be in a year, we're looking at what's current market rent right now. And maybe going even a little bit below that, in some cases, or right in between where you know, the high and the low is, and what we feel product-wise, you know, how our product fits in that.

And we've been fortunate because we've been in a really good rental market, where a lot of times are less, what, five to eight years, the rents are typically 50 at least or sometimes even 150 to $200 more per unit, which makes the numbers that much better.

It's all about looking at the comps and seeing what surrounding similar rental properties are ready for being conservative. I like that. Go do your due diligence. Yeah. And then understanding. Okay, what's being built? What's coming in taking it a step further as well?

Steve Olson
Well, it's very tempting, and I've seen this happening lately. I mean, what about when the music stops? If you've been investing the last five to eight years, you that's that rising tide lifts all boats, right, no matter what you built, the rent was probably higher when the unit was completed than what you thought it was going to be when you projected it.

And I've started to see a few people starting to go I didn't work occurred market rents, but I think they're going to be here in a year, and everything is built on what they think is going to happen in a year. That's a hard position to be in because you're trying to make a deal work. And, you know, I've sometimes I've found myself going down that path a little bit. I think you got to be careful about it. Yeah, definitely.

Sherida Zenger
That's funny, I actually looked up a property yesterday in Idaho for a client, and they had a current mark, or their current rents right now, like 950, 955, and then in another column, they had projected rents of 1325. So I sent the gentlemen an email to the listing agent and just said, Hey, can you please explain? He has yet to get back to me. So that'll be interesting to see why he thinks that those market rents are totally different than what the current rents are. But that's a significant jump.

So that's something to be aware of, to absolute. Why is he looking at that? Does he see something I don't see? Or is he just doing this so that he can justify the purchase price?

Steve Olson
Yeah, proforma will tell you, they craft that to tell you what you want to hear. So you can get a reputation pretty quickly. If you're doing a pie in the sky performance. I ran into the same thing last week, we're helping a client buy it. This was a four Plex. And the rents the cap rate was mediocre. But it's mediocre in the entire market, in most cases right now. But yeah, we did find one of the units was under rented. That's why it speaks to us to know your market. Right? What what is the market rents because a lot of these, we call them mom and pop landlords get lazy, or maybe there's a bad management company.

And over time, it's very apparent that they're not collecting enough rent on this property. Right. I could move tenants out of here and release that thing for 100 200 bucks higher. That's a tremendous amount of value when we're talking about cash flow. So when you're deciding a market, and I think that's the original question, we asked here, how do you decide which markets are best? It needs to be one that you know, right? You need to be able to look at a deal and say, You know what, those rents are too low. That projection is too high. Nobody's going to rent that. You know, it's a funny market. We talked about this about 18 months ago, we expanded our business operations in Phoenix, Arizona, and looking at lots of land opportunities.

And everybody kept saying go to Buckeye, right if you know Phoenix, You know Buckeye? What is it chase? Probably 90 minutes outside of downtown to get to Buckeye. maybe an hour, maybe an hour, maybe an hour. Yeah. Now it doesn't feel like an hour. It feels like more. Because when you leave the west side of the valley, it's like you're in an old Western movie, right? Yeah, you're on the 10 on your way out to Los Angeles. But it's like there's nothing there. And then all of a sudden Buckeye shows up. And it's there. And there's Home Depot and Lowe's and restaurants and movie theaters and everything. And going Wait, why is this here? Right? I can't figure it out. So people kept saying you need to go to Buckeye.

That might be true. Now I don't know yet. But I said, Well, why do we need to go to Buckeye. And I remember our project Superintendent Mike kept saying, well, this blowing up. Why was this blowing up? I might I don't get it. Why is it blowing up? Well at the time, and like I said, this may be different. It's been a while since I've dived into Buckeye. But people from California could move to Buckeye, Arizona and buy two acres and build on it or just have their own property.

That's why it was blowing up is because it was cheap to live there. But the employment base for tenants that were ready and willing to pay a lot of rent, wasn't there. Right? They could easily go into the city into like surprise and Goodyear and Tolleson and some of those cities right on the west side. That's where they worked. That's where they could also live. So I wasn't ready unless we had rents that were substantially cheaper than in the core of the city. Because what else would incentivize somebody to drive out to Buckeye? At night after they work somewhere, you know, in the logistical area up there along 303? Right. So that's something you have to consider too. I bet it's different now though. We should we should check into it.

Sherida Zenger
Yeah, that's been kind of fun, too. Sometimes just even going when we're trying to analyze a piece of dirt that we have, that we're getting ready to sell out to our investors has been going into some of the other property management companies, or just you know, making phone calls, but driving the area.

Chase Leavitt
No, like we've said a few different times on here. Know the market know the area, go do some due diligence, drive around, ask questions, see who the neighbors are, make a huge difference and look at it from a tenant's perspective. If you're a tenant, are you going to want to drive to this location? Do you feel safe here? Is it close to amenities? You know, we'd like to be close to freeways. One of our inside jokes is is there a Costco or chick fil close? By? If so let's buy it. So Hmm.

And a good example of that is the Fourplex Investment Group's Village on Greenway project in El Mirage, Arizona. If you look up El Mirage, online, it's not gonna have flying colors. But if you actually drive it and go there, take a look at it. It's in one of the better locations of El Mirage in Arizona. That's it. So there's a story to tell with every project, and it helps to look at it.

Before we wrap it up. Another really helpful piece of advice to anybody considering build for rent is one good thing that the age of COVID stupid COVID all right has given us is the city council meetings are all recorded, and they're all online. Now. They're usually broadcast live, you can be sitting in Missouri, and you can watch the city council meeting in Seattle right that night.

Steve Olson
And you can see what are the other projects being proposed in the area? What's being built over here? What's being built over there? Because having insight into that makes you look out across that raw land in an entirely different way. Right, you know what's coming. So we kind of talked about don't do projects because of Oh, here's what I think it'll be in the future.

But that's not entirely correct advice, because you got to know what's happening in the future. Right. And if you see a bunch of other developers and office managers making plans that will tell you something about a project you're considering.

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