How to Select the Best Market to Invest In

Everyone, who has ever had the slightest interest in real estate, will have head of the saying, “Location, location, location”. Location is such an important factor when it comes to real estate investing, especially because it is one of the few things that you can’t easily change. The importance of location applies to multifamily real estate investing as much as it does to buying your own single family home. 

Since we typically don’t live in the apartment communities that we purchase, we have got the luxury of selecting the best locations in the US within which to invest. There are a number of factors that we look for in a target market which ultimately support the rental rates that we can charge, as well as the vacancy levels that we can expect. We will explore our selection criteria for submarkets within an MSA in a later article. so for now so let’s dive in and take a look at some of the key factors that we look for at the MSA level.  

Population Growth 

We need people to live in our apartments so we look for a large and growing population. Some of the factors below will give insight into why the population would be growing. We also dive a little deeper into the population data to look for above average instances of single people, below 35 or people over the age of 65 since these groups have higher percentages of renters. 

Employment Growth 

High unemployment / declining unemployment will result in more people moving to an area to look for jobs and it will also mean that people who rent will have the means by which to pay their rent – a key element in a successful multifamily business model! 

Wage Growth 

Growing wages will allow renters to pay more, put simply increasing wages results in inflation and therefore higher rental rates. Higher average wages that come from higher paying jobs coming into an area, rather than just wage inflation from the existing jobs will also have a positive knock on effect. For example when Amazon decide on their location for HQ2, with thousands of highly paid software engineers we can expect to see significant job creation and wage increases in the industries that will serve that demographic. 

Industry Diversity 

Whilst all industries are cyclical, they are rarely all at the same stage in the cycle at the same time. By selecting areas that have employment diversity across multiple different companies and multiple different industries, we can ensure that there will always be adequate jobs for our renters. Understanding the industry breakdown of the jobs growth in an area can help investors better understand whether the the type of people that will rent their apartment s are coming  

Supply/Demand 

Basic economic theory informs us that when demand is greater than supply, prices will rise (and vacancies will decline). Specifically for multifamily investing we want to monitor how many apartment units are available in a certain area and how many permits have been filed to build new supply 

Affordability 

Understanding rent as a % of household income, the cost of renting versus owning and also the rate of increase in median home prices can be key factors in understanding how many renters there will be. If house prices are high and increasing then more people will be likely to rent which is a positive demand factor for multifamily investors. 

Business Costs 

It is no accident that some of the most business friendly states in the US have some of the most desirable cities for real estate investing. Texas, Florida and North Carolina are all business friendly states and as a result have been able to attract more jobs and inhabitants than less business friendly states 

Many of the criteria above are interlinked so it is important to explore all of them to understand the key drivers that impact the whole picture. Picking an MSA that scores well in all of the areas above won’t guarantee success but it will set you up for success. For more insights into successful multifamily investing subscribe to our monthly newsletter here

How to Evaluate a Sponsor

Why do you care about using a sponsor? Investing in multifamily via a sponsor or syndicate is a great way to leverage the experience and time of the sponsor in exchange for your capital and some of your return. By getting good at performing due diligence on a sponsor you can better assess alignment with your interests and improve your chances of hitting your investment goals. Sounds easy? Well it is, but you want to make sure you have the right sponsor! 

So, how do you evaluate a sponsor? I’ve outlined evaluation steps below designed to give you the tools and context that you need to evaluate any sponsor. I’ve broken down the process into: 1) initial screening questions to decide whether or not further due diligence is worthwhile, and 2) detailed screening that involves a combination of both quantitative and qualitative criteria. Are you ready?

Initial Screening Criteria 

1) Niche 

There are so many different real estate niches out there, never mind all of the different markets available. When we evaluate a sponsor, we look for depth of experience in the asset class that we are interested and in the market in which we want to invest. We definitely don’t want to invest with a sponsor on a multifamily deal in Florida when all of their previous deals have been mobile home parks in Alaska. 

2) Experience 

We look for years of experience, both in total and specific to the investment in question. Whilst we have invested with newer sponsors in the past we do want to size our investment accordingly and we also look for a fee structure that reflects the level of experience in question. 

3) Alignment 

The best alignment on a deal, in our opinion, is co-investment from the sponsor on any deal. We will not invest in a deal if a sponsor is not also co-investing some of their own capital alongside us 

Detailed Screening Criteria 

1) Fees 

Syndicators often charge a whole host of fees – acquisition fees, management fees, construction fees, refinancing fees, disposition fees, you name it. It is important to get detailed insight into what all of the fees are and the sponsor should be able to detail clearly what value they bring for the fee. 

2) Track record 

Beyond the initial screening question of years of experience it can be helpful to understand how many deals the sponsor has completed, high/median/low exit returns of deals completed with outsiders funds, the total asset value of the sponsors investments, the number of times they have issued capital calls, typical investment %. 

3) Communication 

Unlike a stock where you can check the stock price every minute, a syndicated real estate deal does not have the same level of real time insight into performance. Sponsors that are prepared to send status updates monthly, provide quarterly financials and give ad-hoc updates on anything that can impact the value of your investment are indicating that they better understand your needs as an investor and are therefore more desirable. If a potential sponsor cannot articulate a clear communication strategy, they likely don’t have one and this is a strong signal of how important you, the investor, are to them after they receive your money 

4) Organization 

Multifamily syndicated deals are complex transactions and require many specialists in order to succeed. By understanding the team members of the syndicate you can get further insight into and key person risks, their relative experience and alignment with the investment in question. One thing that we always look for is independent, third party management 

5) Trust your gut 

Meeting the sponsor face to face can be very helpful in terms of deciding whether or not this is someone that you can trust. While it’s not foolproof, it can be a helpful validation step, it indicates that you are taking the evaluation process seriously and allows you to build a stronger relationship. 

6) References / Reviews 

Ask for references and call them directly, look for reviews on BiggerPockets or other credible real estate resources, and use this information to cross reference what you have received directly from the sponsor as a further validation check. 

If you cover the areas above you will be much better positioned to pick a sponsor who meets your specific needs. Always feel entitled to ask whatever questions you like and look for a sponsor who demonstrates a willingness to listen and comprehensively answer any question you have. 

Happy Investing and for more articles like this register for our newsletter here

Time, Our Most Precious Resource

Whether we realize it or not, our outcomes in life are determined by how much we are willing to challenge our limiting beliefs. Whilst challenging ourselves, or opening ourselves up to be challenged by others, may feel very uncomfortable it is only by doing so that we can reach our full potential. 

My favorite things in life don’t cost any money. It’s really clear that the most precious resource we all have is time. – Steve Jobs 

I am here to challenge one of the most common limiting beliefs that people have: “I don’t have enough time” Everybody in this world has hopes and ambitions, and one of the most common reasons why people don’t realize these goals, is because they don’t take enough deliberate action due to “lack of time” By reading this article you will understand just how much free time you actually have and how to take a different approach to ensure that you use that time effectively towards realizing your goals. 

I am a father of two children under the age of three, my wife has a demanding professional career and in addition to Phoenix Equity Group I have a full time career in FinTech. Phoenix Equity Group, along with partners has invested in over 800 units valued at over $78,000,000 and I have only been able to achieve this by employing the techniques below to make the most effective use of my most limited resource, time. 

How much time do I have? 

I’m a numbers guy so let’s breakdown just how much time we actually have in any given week. 7 days and 24 hours a day gives us a total of 168 hours. Of that 168 we all need to sleep so let’s give ourselves 8 hours of sleep per day for a total of 56 hours which leaves us with 112 hours. Well, we also need to work so let’s give ourselves 9 hours per day of work for a total of 45 hours which leaves us with 67 hours to spare. Most of us commute to work so let’s budget a 1 hour commute each way, 5 days a week for a total of 10 hours spent commuting leaving us with 57 hours to spare. We need to get ready in the morning so let’s subtract 1 hour for breakfast and getting ready every day of the week for a total of 7 hours leaving us with 50 hours to spare. It can’t all be about work so let’s take 1hour to eat an evening meal and 1 hour to relax each day which adds up to 14 hours, leaving us with a total of 36 hours of time to use as we please, that’s almost a full work week! Think about how much we can achieve if we can start to use that time more purposefully towards our goals. 

How can I make the most use of my time? 

Here are a number of techniques that have enabled me to make progress towards my goals every single week of the year. 

  1. Plan – Keep a master list of tasks that you need to do, writing these tasks down is a prerequisite for the following steps 
  2. Prioritize – Set time aside to prioritize what tasks you should work on. In the past I have made suboptimal progress towards my goals by focusing on urgent or small unimportant tasks at the expense of more important or bigger tasks. Today I use the Eisenhower Method developed by President Dwight D. Eisenhower to categorize my tasks so that I ensure more focus on longer term strategic goals 
  3. Protect your Time – Now that you have prioritized your tasks you will need to plan some time to work on them. This is the most critical step in my opinion since without deliberately blocking off and protecting your time distractions will end up consuming it. I would suggest blocking off significant chunks of time to work on specific items 
  4. Eliminate Distractions – Modern life is full of distractions from texts, IM’s, phone calls, emails, alerts, etc. While each of these distractions seem small they can actually have a major impact in your ability to work of tasks that require concentration I.e. the kind of tasks that really make a difference to your outcomes. Find a distraction free environment to work in and simply put the rest of your life on hold until you have completed the important task you had allocated that time for 
  5. Say No – What you ultimately achieve can be as much about what you do as it is about what you don’t do. It is critical to learn to say no to time consuming commitments that are not in line with your goals. Many of us are subject to “Shiny Object Syndrome” which can cause us to lose focus on completing the task at hand. We must get very good about saying no to things that take away from our precious pool of time 
  6. Leverage – We can leverage our time further to try to achieve multiple goals at the same time. One example of this would be to consume educational material while commuting. If you drive and can’t read a book then try audible books or podcasts 

Practicing the steps above will help you to find the time that you need to realize your dreams, I have practiced each of these steps to help me to realize my dreams. If you would like more insights you can subscribe to our newsletter here 

The (Data) Science Of The Deal: How AI Will Transform Commercial Real Estate

Here is a well balanced article from Forbes on how AI can help inform better investment decisions in the Commercial Real Estate industry. AI won’t replace humans but it will help inform better decision making and it will identify correlations that humans may have overlooked.

https://www.forbes.com/sites/forbesrealestatecouncil/2019/01/23/the-data-science-of-the-deal-how-ai-will-transform-commercial-real-estate/amp/

The team at Phoenix Equity Group have been busy analyzing some of the companies that already offer access to this functionality, part of our drive to use cutting edge technology to inform better investment decision making and to improve operational efficiency

12 Ways to Ensure Real Estate Investing Success During a Downturn