The Investment Golden Triangle: Great Market, Great Deal, Great Team
There are three key components of every great real estate deal. They are 1) the market you invest in 2) the deal you choose and 3) the team you invest with. The best opportunities combine strength in all three areas. If one area lags, that could spell a marginal return or an all-out bad investment. You have probably heard the stories of someone choosing a bad operator that steals the partner’s money, or a deal that was not underwritten correctly and didn’t perform well, or an area that lost the main employer so all investment opportunities in the area sank (like when Air Force beats Navy). If you want to achieve a satisfactory return, it’s important to find opportunities that have strength in all three areas.
Choosing the Right Market
I think this is the fundamental piece because the overall market will likely impact your return most significantly. This is why the Growth Vue team has spent so much time analyzing markets and chooses only the best of them to look for deals in. Three main things drive the returns with multifamily apartment investments and are all largely dependent on the market. They are:
- Population Growth
This is the first thing to look for when scanning markets to buy apartments in. The people in that market are your customers. And if the population is declining, you have a problem because that means your customers are leaving you and thus demand is dropping, and supply will increase. This hurts the price and, therefore, your returns.
You can find good, usable population data on the Census Bureau’s Website, here: Metropolitan and Micropolitan Statistical Areas Totals: 2010-2019 and the Bureau of Economic Analysis, here: https://apps.bea.gov/itable/iTable.cfm?ReqID=70&step=1.
Another place that we pull useful information about net migration is from Texas A&M’s Real Estate Center, here: https://www.recenter.tamu.edu/data/population/
2. Job Growth
This vital statistic indicates what is bringing people to the area and how they pay their rent. If jobs are entering the area, so are people. This means demand is increasing and rents will likely continue to rise. The opposite is also true. Take Detroit in the automotive bust; thousands and thousands of people lost their jobs and became unable to pay their rent and so the whole area suffered for years.
3. Wage Growth
This statistic also sheds light on the likelihood that rents will continue to increase in the future. In every multifamily analysis spreadsheet, there is an input that accounts for the annual appreciation expected for the performance of the property. If wages are increasing in the area that you own a property, the input for appreciation will likely be positive and your returns will reflect that.
These are only some of the main market characteristics you will want to consider when looking at multifamily investment opportunities. In my opinion, you should select the market first. If, on the contrary, you search for and underwrite deals first and then find out that the market it is in is not viable then you have wasted your time and the broker’s time who gave you the deal. You will save yourself a lot of time and rapport with the professionals who will aid you on your journey if you do your diligence up front and find the right market based on your investment strategy and goals.
Choosing the Right Deal
This one seems intuitive, I know. Pick a good asset, I get it. However, what another operator might not ask you is: does the property meet your goals?
Some invest for cash flow. Some invest to preserve their wealth. Some invest to grow their wealth. Based on each of these goals, there may be different properties that satisfy those goals.
For example, an underperforming deal with no big capital expenditures may be a better cash flow play. An A-class asset in a downtown area, with lower returns but the lower risk, may be a better preservation of wealth play while a C class property with some capital expenditure and operational efficiency needs may be a good equity and wealth creator.
The key is to look at the deal based on what you want to achieve. Not every deal checks every box. Don’t let someone sell you on a deal that doesn’t meet your goals. I always find out my investors' goals first so that I can appropriately match opportunities. To me, this is paramount in finding a deal that works for everyone.
On top of that, check the underwriting to ensure the numbers and assumptions make sense. If an operator tries selling no capital expenditures with big rent bumps, and 6% annual market appreciation with no replacement reserves, you might want to second guess your investment decisions. Trust, but verify that all information is correct and matches on paper what is said aloud.
Choosing the Right Team
Choosing the right team to invest with is so important because you want to make sure that your money is protected and can grow under the principles and values of General Partners. After all, the GP’s are the ones who make the decisions for the deal. You want to find the General Partnership that acts with stewardship of your funds.
You want to know, like, and trust the team you are working with. If their values do not align, then it is probably best to find a team you sync better with – even if they are operating in a great market or have a great deal. The fact is, you will be in a partnership with these people for three to five years, possibly up to ten years depending on the team. Do not be the person that invests a large amount of capital with a team and after the first six months, you find their values are not aligned and then wish you could get out yet have your capital tied up.
The good news is, this may be the least complicated analysis on your part. Who do you feel comfortable with? That’s what it comes down to. For example, with me, I would be confident to give any member of the Growth Vue team my social security number and bank account information if I to. They are all either business leaders, military officers, family men, or a combination of those or other traits in people that give instant credibility. And then on top of that, they are stand-up people, so for me, it was easy to choose them as a team to invest with and ask others to invest with. This is the kind of chemistry you want to feel. And if you don’t, at least check the objective boxes and give the relationship a chance to build to find out if they are the kind of people you want to be in a financial relationship with.
At the end of the day, you want to feel comfortable that your money is in the right hands, regardless of the market or the deal.
Wrapping it Up
So, there it is. Now you have the basic elements to choose the right investment opportunity for you. First, you want to find the right market based on the fundamentals that drive multifamily returns, vet the deal to make sure it fits your goals and contains realistic assumptions, and finally determine if the operating team is a good fit for you. If you can find an investment opportunity where all three of those boxes are checked, you should find yourself in a great position to achieve high returns in an asset class that historically has exceptionally low risk. What’s better than that?
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Blake Dailey is a multifamily real estate investor and host of the Multifamily Journey Podcast. He has reached his financial independence (Passive Income > Expenses) number through investing in real estate and aims to help others do the same. He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate through his company Growth Vue Properties. Growth Vue seeks to help investors achieve the ultimate asset – Time – by making their money work so they don’t have to.
Find out about investing in multifamily with Blake at thegrowthvue.com or learn more about Blake, read his articles, or connect with him through his website at multifamilyjourney.com.