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How to Invest in Good Deals

How to Identify a Good Deal

When it comes to a great real estate multifamily property for sale, would you know if a good opportunity landed in front of you? Would you know whether to jump on it and make an offer, or would you quickly know to move on?

Life is abundant with good opportunities; many come and go. The key to success on this path is to identify which of those opportunities are genuinely good ones and which may be better suited to others with a different agenda, plans, or needs.

Have you ever thought about real estate investing, delved a little further down that route, and realized that it’s a whole new world with various tangents? As with anything in life, the more you look, the quicker you realize there’s much more to this! Now, you don’t quite know where to get started. But for those looking to enter the world of investing in real estate properties, this article is for you.

Don’t let intimidation stop you from taking action. Like with opportunities, there’s an abundance of resources to help you gain basic fundamentals. Fortunately, there is another way, and that is Real Estate Syndication. This is where professionals handle every daunting task to minimize the complexity of real estate for you, as well as manage every aspect of the asset to simplify your part in your investment path.

Partaking in real estate syndication allows you to invest via a sponsor who pools your funds with other investors to purchase commercial property that neither you nor the other investors may individually be able to do so, nor would want to do so. Typically, the project is a larger-scale property (e.g., a 200-unit apartment property), which is very hard for a sole owner to take down, nor would want to.

The involved sponsors and operators undertake hefty responsibilities and are professionals in the process and systems to secure and manage the asset. The sponsor runs the show, looks for and identifies a good deal, while the operators undertake deep analysis of property financial performance, handle the transaction process, and work diligently with all affiliated partners in lending, insurance, legal, property management, etc.

This makes it possible for investors who have no interest or time to be a “landlord” or property manager yet still allows them to enjoy the financial benefits of investing in commercial real estate. It is in every member’s vested interest that the operators know how to identify a good deal when they see one.

Now, you’re really excited at this point since all that sounds excellent. What a great strategy to be able to enjoy something very passive and completely hands-off. So now you've decided you want to partake in passively investing in real estate. You may have never really cared about real estate before, and now you see opportunities to invest everywhere you look! Someone mentions a city, and your brain immediately thinks, ‘I should look for investment opportunities there; I hear it’s booming!’.

Welcome to the Baader-Meinhof phenomenon. Once your brain is excited by something you brought into consciousness, you suddenly see it everywhere due to the selective attention placed on it. So let’s satisfy your interest! Though we are talking about passive investments into a real estate syndication, you should still know a bit about how all those opportunities you’re suddenly seeing all around you, which of these are actually good ones?

Characteristics of a Good Deal

If you’re a savvy real estate entrepreneur, you’ll quickly know the key elements you look for when hunting down deals.

Many factors play into a good deal. It’s unbelievably overwhelming to dig into this without much guidance, which is why this article serves you in helping you lock down some crucial basics. Here’s what to look for when identifying if a deal is good:

  • Off-market: The deal sponsor team likely built a solid relationship with the broker, which is why they purchased the property "off-market" without any competition on their purchase price. This likely means the sponsor team did not aggressively overbid to successfully win the deal and is likely able to have won the deal for a discounted price. This is a great benefit on the returns side for our investment.

  • Value-Add: Purchase of a real estate asset with the intent to create an increase in equity to the asset through improvements to the asset. The concept is simple: Buy low + upgrade the units + sell it higher. We aren’t flipping here essentially but rather providing value by improving the units to increase the NOI through bringing up our rents.

  • Track Record: Tells you the sponsor team’s experience level, how the current assets under management are performing, and how much money the sponsor team has made for their investors from previous investments.

  • Strong Sub-market: Where there is positive growth in population, the job market, and the local economy will follow suit.

  • Proven Model: In real estate investing, this means that a property is so desirable and not frequently available because it is usually occupied all the time. This ensures there would always be someone who wants to live there, and you would always be getting rent.

  • Equity Multiple: A metric used to evaluate the performance of your real estate investment as a multiple of your total equity invested. This is a useful tool for quickly comparing deals side by side. The simple formula: Equity Multiple = Total Cash Distributions/Total Equity invested. i.e., 2x = $200,000/$100,000.

  • Unit Count: Refers to the number of units (usually apartments) that are available for rent in a building. What this means for an investment is important because it tells you how much potential income a property can generate. The higher the unit count, the more money you can make from it.

  • Conservative Underwriting: Good deals meet metrics with conservative assumptions. This means exit CAP rates are projected on the higher end "just in case." That could mean planning for additional expense savings that you don't account for, underwrite with more conservative rent increases that don't stretch the market. If investor returns make sense with conservative assumptions, there is more wiggle room in the deal in case the business plan deviates slightly from projections, and anticipated return metrics can still be obtained. Sometimes with conservative underwriting, investor returns exceed projections.

In conclusion, there are many good potential multifamily investment deals out there. The key is a combination of all these factors with a good business plan in place to maximize the potential of the property. You should speak to your sponsor to get a good understanding of how the team plans to carry out the business plan because there are a lot of things they consider. That is why you should identify syndicators that you trust and will be your guidance to your success in investing in multifamily syndications.

When you have been presented with a good deal, as long as you find one that will get you results and make money work for you, take time to make your decision to invest. Consider an investment that will make you the most money possible, keeping in consideration the duration of the hold, and choose carefully. We hope this is useful and beneficial to your decision to invest in helping you find ways to make the most of your money!

Cheers to your Success!

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