We’ve entered the 4th quarter of 2021, and much to many of our disgruntled surprise, we’re still technically in a pandemic. The economic and social impacts have been spread far and wide, though admittedly some areas and industries were hit far harder than others. While some of the fundamental principles for a strong market are still intact, there are new factors now that have to be taken into account when evaluating the strength of a market.
An ideal market to invest in has a historically consistent upward trend in job growth, with a diverse number of major employers and industries. The more diverse an employment market is, the more likely it is to continue to attract talent into the area from across the US, and therefore continue to grow the demand for housing. But...with a remote workforce now becoming more common place, this rule of thumb is not as simple and straight forward as it once was.
Moving into a post-COVID season, employment data has to be carefully evaluated, taking into account factors like the local unemployment rate, how resilient the particular market has been in its recovery, and what the numbers indicate for job growth pre-pandemic vs post-pandemic. Good indicators for job growth are not just the historical trends, but also how much lost employment has been recovered, and if that market is actually exceeding it’s pre-COVID job growth rates. Ideally, you want to invest in a market that is recovering well and displaying promising signs for continued employment growth.
The lion share of profit is made when you sell the property. This is why appreciation is another key factor. I look at markets that have strong appreciation potential and if property values are increasing. If they are, it is more likely to sell the investment at a significantly higher price than when it was bought. This is why I am a big believer that you make money when you sell a property, not when you buy it.
In 2021, however, it is clear that it is a seller's market. This shows that inventory is not only low, but the price at which a deal is purchased is higher than normal due to the competitive natural of a seller’s market. Real estate is a cyclical business, and even markets with strong appreciation can suffer when the economy turns. A market with increasing prices is not a guarantee that you’ll make profit when you exit, but it’s a safer market to be in when you buy. Therefore, the history of the particular market can clue you into its pervious performances, both positive and negative. A market that has a consistent bounce-back rate, even when the real estate cycle is lower, is a good indicator that is will do so once again.
Before the pandemic, it was pretty clear as to which state were or were not landlord-friendly. Landlord-friendly markets have a direct impact on real estate and the return of the investments. Before the pandemic, some states, such as California, were very tenant-friendly, which means that it can take up to 9 and even 11 months to evict a nonpaying tenant while, in the meantime, you pay for the mortgage and the expenses. Other states, such as Texas and Florida, are landlord-friendly and provide owners with a quick eviction process.
Now, the line of landlord-friendly states has become a bit blurred. In 2020, the CDC imposed a federal moratorium on nationwide residential evictions, temporarily, for nonpayment of rent. While the moratorium has since been ended on a federal level, many state and local level eviction bans remain in place. Depending on the market you are looking into, a once thought to be landlord-friendly city may now be more lenient granted the gravity of unemployment during the pandemic. When looking into a market, be sure to not only check the state’s laws on eviction, but also research and consider what is being implemented on a local level. This key component can be a determining factor when it comes to investing in a particular market.
The pandemic has to end at some point, right? For now, the best bet is to look ahead into future investments through the lens of “the new normal.” Determining whether a market is strong is not as clear as it once was, which is why doing due diligence with consideration to post-pandemic life is important. The first shift is the employment rate. While job growth remains a strong indicator of a growing market, more of the work force is working from home. Be sure to consider the unemployment rate of the area, and its ability to recover since COVID first came into the picture. Secondly, appreciation potential shows a market’s ability for continuing growth. It’s a seller’s market now, but due to the cyclical nature of real estate, a market needs to be able to remain stable in order to be considered strong. Finally, landlord-friendly states may now have local ordinances that grant leniency to nonpaying tenants. While the world is not as we once knew it, opportunity and potential for growth is still there - you just have to know where to find it.
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About the Author
Ellie is the founder of Blue Lake Capital, a commercial real estate investment firm specialized in multifamily investing throughout the United States. At Blue Lake Capital, Ellie partners with both institutional and individual investors to grow their wealth by achieving double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
A defining factor of Blue Lake Capital’s strategy is founded in utilizing machine learning/artificial intelligence throughout the course of all acquisitions and asset management. This advanced technology enables the company to produce accurate and data-driven forecasting for all assets on a market, property, and even tenant basis. In doing so, Blue Lake is able to lead commercial investments with the full capabilities of today’s technology.
Ellie is the host of REady2Scale , a podcast that highlights honest, insightful, and thought-provoking discussions on the multiple approaches for successful real estate investing.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.
You can read more about Blue Lake Capital and Ellie Perlman at www.bluelake-capital.com.