Multifamily Acquisitions: Buying in Your Own Zip Code

by John Wilhoit Jr. on

My zip code

Information about how to buy multifamily properties is on every corner through seminars, books and  late night television.  But where should  one buy apartments?  What location?   How does an investor select apartment market areas for acquisitions?   Too often market selection  is  based on criteria completely unrelated to sound long-term multifamily ownership strategy.

As a commercial investor in multifamily property I believe it is difficult to justify buying a multifamily asset based on the decision my wife and I made as to where to raise the kids.   To me, that’s like having to buy a car in Detroit or Brazil because that’s where they make them.  What does that have to do with the value of  the underlying asset?

There is not necessarily a correlation between  quality apartments developments and your very own zip code

Frankly, in many instances, I believe investors are better served with some distances (measured in miles, not blocks) to avoid the temptation of micro-management.

I’m guessing perhaps five of the last ten things you have purchased were made in China.  Been to China lately?  Me neither.   Quality multifamily properties were NOT built based on your home base decision point.  Therefore, I submit, your decision as to where to acquire apartments should ALSO not be based on this same data point.

Justifying a flight to safety by staying close to home negates most requisites to good  underwriting

Insurance company’s do not sell insurance only to those within a stone’s throw of the  home office.  Neither should you acquire multifamily assets based on where your family resides.  Granted, it could happen.  Let your underwriting standards select locations starting with proximity to jobs and job centers.  Not parks.  Not drive time to your favorite pub or ice cream parlor.

Spock, my cape!  We go forth toward the great frontier!  As long as it’s in our zip code

Flight to Safety and  Close to Home Have No Correlation.  When it comes to preservation of capital close to home does not necessarily correlate with higher levels of safety or yield.   Recognizing that many people like to “kick the tires” of their investments, it seems that real estate is one of the few investments where proximity to one’s personal residence is a factor.

Does Warren Buffet Buy only in Omaha?

For those with stock and bond investments, if you own AT&T, is it important to you to know the whereabouts of every AT&T facility or each and every infrastructure project that GE is building?  Why then, do investors believe that if they can drive by their multifamily assets that the property is perhaps better secured?  I just dont see the correlation.   Quality multifamily assets are quality assets.  If the investor is a resident of San Francisco and their investment is in Austin, Texas what’s the beef?

Follow quality and yield, not proximity to your own house.

There is ALWAYS a correlation between the quality of  multifamily assets and the income derived.   We can spare over degrees of freedom, age factors, location of course, amenities etc.   When seeking safety of principal what do you buy?   Quality.  Quality over quantity.  Quality over warm and fuzzy feelings.  Quality over price.  Quality over mature landscaping.  Quality over proximity to your own house.  Did I mention quality?

“Buy land, they’re not making it anymore” – Mark Twain

I grew up in southern California.  I’ve lived on the east coast and now in the Midwest.  When my wife and I first arrived in the Midwest (after flying over one thousand miles of open land) we sat down with a Realtor in a city of  less than 100,000 people with the nearest big city being  over one hundred miles away.

We shared with the Realtor that we wanted; a home with one or two acres and certain other particulars.  Before we could finish she pursed her lips and  shook her head telling us that such a property was not to be found…. they just didn’t build homes on one and two acre parcels around these parts.  What?  We found another agent.

And so it goes.  Apparently, whatever apartments we are looking for are not to be  found.  Oh, you want that in blue?  We only have gray today.  You want a low-rise  apartment building in Chicago.  Sorry, but we’ve got some great garden units across the lake…

My point is once you have decided on geography and sub-market specifications- do not deviate from the level of quality selected.  I will suggest, based on experience, that attempting to stay in a single market and  acquire multifamily assets of quality is a difficult proposition.

Be willing to expand the search area outside of your own zip code, careful to stay with quality multifamily assets as defined by  you.  Long-term investors in the multifamily asset class buy quality based on factors not related to their own residence.  I submit this is a good practice.

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