Selecting the property according to investment criteria is a smart way to quickly filter through the tons of opportunities that land on my desk. Spend a few seconds on Loopnet and you will see there are thousands of apartment buildings for sale at any one time. This supports the Mindset of Plentitude – Yes indeed there are enough deals to go around!
So to help narrow the field of possible investments, I search for deals, invest in deals and underwrite deals that fit the key criteria:
The market or location where I buy properties is one of the most important criteria. While all criteria must be fulfilled, the importance of the market cannot be understated. There are many points outlined below which are considered in finding the right market.
Above average population growth
Population growth is important as that provides the tenants who will be renting our properties. I want markets where the population is growing organically but also inorganically – meaning others are moving to this market.
Above average job growth
Job growth is important since it provides the money people need to live and thereby allows our tenants to pay rent. Since it takes companies time to develop workspaces and hire people, this is a longer term indicator for prosperity. People to move to the city for jobs. Secondly there is also a multiplier effect for white collar jobs. Each white collar job typically creates multiple blue collar (service) jobs.
Multiple employers and industries
I like markets where there are multiple employers and several industries. Markets and economics can change. if there is only one major employer (e.g. Military base) or only one industry (Mining, Oil, Military, Banking, etc), the real estate in this market is more volitile. Think about closure of a military base.
Investing in landlord friendly markets is important. In some states, one cannot evict a non-paying tenant during the winter. In other states, it takes six months to get a court order for eviction. The tenant is living for free during this time and likely causing heavy wear and tear on the unit being occupied. The markets I invest in, I can typically evict a tenant within a few weeks of failure to pay monthly rent.
The property class helps to further filter the vast number of opportunities. I look for properties which are considered Class B and Class C properties. I will usually avoid Class A and Class D properties.
Class A properties are traditionally upper middle class to higher class properties. They are new, have many amenities and luxuries. They are the ones to have higher vacancies in times of economic crisis since they are rented by white collar tenants and white collar tenants are the first to lose jobs in times of recession.
A second reason I do not invest in this class is that this space is dominated by REITs and large pension funds. Finally, this class offers lower returns.
This one is simple. I invest in apartment buildings. There are a lot of types of real estate for which commercial financing is available. Trailer parks, mixed use buildings, office buildings, Self storage, industrial use, parking garages and multi family real estate (apartments).
It is easy to get distracted by the shiny object syndrome and try to do it all. The challenge is each of these types of property is unique and so are the valuations, underwriting, business models and contracting terms. I FOCUS (follow one course until success) on multi family apartment buildings.
I look for properties with between 80 units and up to 300 units or more. This offers several advantages. It is large enough for full time maintenance staff. It is large enough for syndicating – meaning I can offer investment opportunities to people where they can earn a high return and passively invest along side me.
Additionally, this size property is larger than small, inexperienced outfits will typically buy. Finally, it is under the size that large pension funds and REITS will typically look at. Thus, it is my sweet spot.
Property price will depend on market, property class, property size, condition, interest rates and several other factors. During underwriting, I run the numbers and have them checked by partners to ensure we are not overpaying. The sweet spot for properties that I like to invest in run from $4 million to $20 million. This size offers opportunities for syndication investors to partake in the investment and earn a high return.
During the underwriting, I look for properties which will allow me to provide a double digit return to investors. The properties I review and invest in provide opportunities to investors to earn passive double digit cash on cash returns and a total ROI in the high teens to low 20’s over a hold period of 3-6 years.
Investors earn quarterly distributions as a return on the cash they invested and a large capital gain at the sale or refinance of the property.