Obviously, there are a lot of factors when you look to invest in an area. Number one in my book is your own personal proximity to the region. Local knowledge and contacts are critical pieces, as is the ability to drive a short distance to meet with people face to face. Other than those items, which are very specific to each individual person’s needs, my favorite way to quickly look at market to understand what is going on is to look at:
1) How has population grown?
2) How do the market rents compare to the salaries in the area?
POPULATION GROWTH
Population growth is easy right? Are people moving to or from the area? If the population has been growing steadily for the past 5 years that means an increase in demand for the area. That’s a good indication that rents will be going up. It’s important to be careful with this metric and dive a little deeper into what is going on with the city. Lately there have been some cities that have booming population and have temporarily overbuilt rentals which has temporarily deflated rental rates. Generally speaking, you’ll know if you’re in one of those cities but this is the reason I like to stay away from cities that have population growth that is growing too fast. I like to look for a steady growth.
RENTS VS SALARIES
This one is less obvious at face value but it makes sense when you think through it. Generally speaking, renters should be spending no more than 1/3 of their salary on rent. If they are spending more than 1/3 then they are stretching to concerning levels, if they are renting for less than 1/3 of their salaries then they are comfortably affording their rent.
If you look at an entire city through that lens, if average salaries are more than 3 times the average annual rent it theoretically means as a whole the average renter has the ability to pay more in rent.
SO WHAT DOES THIS TELL US ABOUT NEW ENGLAND?
It’s expensive. No one is making more land, population is increasing and the cost to rent relative the salaries is close to the highest in the country. It’s a real problem that policy makers are concerned about in a real way, no one wants talented people to be leaving because they couldn’t find a home. New England draws in some incredible talent with good colleges but there is real concern that they won’t be able to afford to live here. However, if you’re a real estate investor it’s a double edged sword, rents are unlikely to boom because salaries can’t support it, but this high demand is likely to create a consistent market growth for years to come.
As always, we’re looking for 3-50 unit properties in Southern New Hampshire. If you know if anyone looking to sell, we’d love to talk to them.
Thanks for reading,
Steve Parry