Market Selection Multifamily Investment

As we reach year end, we are gearing up for an active 2025 for acquisitions and development. This has us honing in our investment theses and target markets for both multifamily and industrial (industrial outdoor storage and self-storage).

Last week, an article by Jay Parsons on the merits of investing in multifamily in California versus Texas popped up on the top of my feed. The California versus Texas debate is one that I get asked about fairly frequently. The article noted that Southern California has a cap rate premium of ~40 bps as compared to Texas. I want to point out a few reflections on this topic.

1. Geography should not be the primary filter for multifamily. At Westlake Realty Group, we focus on two main factors when selecting target markets. First, it needs to be a market where we have expertise. Second, we look for markets with low rent to income ratios. For example, the submarket that our upcoming Santa Clara multifamily project is in has a rent to income ratio of 23%, the lowest of any major submarket in the US. Somewhat related to this, the Silicon Valley submarket is one of the least affordable markets in the country for home ownership. The combination of rental affordability and lack of affordability for home ownership makes this an ideal target market for us.

2. The cap rate differential of 40 bps should not be enough to sway the decision on which market to invest in. Rigorous asset management can easily make up the 40 bps in short order. For example, my husband and I purchased a small multifamily property in Oceanside, CA (San Diego County) 3 blocks from the ocean for a 4.0% cap rate. Three years later (and thanks to some very rigorous asset management from my husband) we are sitting at a 7.25% cash on cash yield. It does not matter if you are in Texas or Southern California, this is a great yield for infill multifamily. What made this a home run investment was the asset management, local knowledge and business plan execution.

We are not saying geography does not matter. We are simply highlighting that it should be one of many considerations when selecting an investment thesis.