“When the tide goes out, you can see who’s been swimming naked.” – Warren Buffet
Wall Street’s been hit hard by the economic slowdown, but here’s the thing…
Multifamily investing isn’t immune. While it’s still a great bet for passive investors, there’s a key element to consider:
Which operators are swimming naked?
As an investor in multifamily real estate, it’s important to work with strong operators that will have your investment covered during a slowdown.
Today, we’ll show you how to weed out the weak operators from the strong ones.
Join us in the video below!
The Makings of a Strong Operator
There are 3 key elements that make a strong operator.
The first and most fundamental element is the team. It’s important to know the makeup of the team; who is onboard and what are their individual stories? To what degree have they experienced loss? Have they gone through a recession?
I'll tell you, I bombed the last recession.
I basically lost my entire net worth. It changed me, and it really positioned me to handle the next recession with grace.
Why? When you have a perspective on something, it actually leaves you a lot calmer than you would be otherwise. Instead of freaking out – “Oh my gosh, tenants aren't paying. We're going under!” – and making hasty decisions (or worse, no decisions), I can look back on past experience as a roadmap.
Better yet, I’ve already put the safety nets in place to protect me, my team, and our investors.
Which bring me to #2. Track Record.
When you’re looking at an operator’s team, you need to understand what they’ve done in the past. What successes have they experienced? What failures?
I’m a BIG believer in failures and challenges because that’s when you really learn things well.
Ask – What challenges have they been through? What kind of storms have they weathered? How did they fare? How did they behave?
These questions are so important because the answers give insight into how an operator will perform in the future, based on previous wins/losses. Their answers will also reveal their character.
If they were only looking out for themselves during the last recession, they’ll likely repeat the same pattern. However, if they sought to pull everyone up along the way, it’s likely they’ll do the same for their investors this time around.
The final element of a strong operator is Conservative Underwriting.
This goes back to how the operator got into the deals 1-2 years ago. Did they cut corners, or sandbag projections to get the deal done? Did they make false assumptions?
Well, that’s all going to come out right now.
There’s so many operators out there who put a deal out with promises of a 17% IRR and a 12% cash-on-cash, and the unknowing investor just gravitates towards the higher return without asking the questions. They aren’t asking, “well, shoot – how'd you come up with that number?”
Trust me, a tiny change can make a humongous difference in the return. That’s why an operator must be conservative in their underwriting to protect the investment from unforeseen circumstances.
Related Article: How to Analyze a Passive Investment Opportunity
Related Podcast: Conservative Underwriting & Risk Management in Multifamily Investing
Be it a change in the economy or a major repair required on the property, unexpected things happen and it’s important for an operator to be prepared for them financially.
One of the main lessons I learned during the last recession is that an operator cannot run out of money. When you get into a deal, you have to have enough money at closing to cover the unforeseen for the first 6-12 months. Then, you have to continue to retain money (in cash) for emergencies.
This is going to be a key differentiator. Operators who have been running thin are going to be really tested. Those that have followed best practices procedures, like I just talked about, are going to be fine.
We’re going to see some operators bubble to the top and others, well, we may be buying their properties here soon!
Warning Signs
For me, an operator that makes aggressive projections is one to be scrutinized. If they do not hit their projections, then what?
In a best case scenario, an investor is not going to get the profits they were expecting. In a worse case scenario, they start losing money. It’s a domino effect: occupancy is lower than expected so they never actually hit their target rents, then a sewer pipe breaks that they can’t afford to fix, people move out, and it just spirals down from there.
Here are some warning signs that an operator is swimming naked:
- Uses a lower cap rate at exit
- Has no reserves at closing, or while operating (Yikes!)
- Projects high rent bumps in Year 1
I can’t stress enough how important that second bullet point is. Even in a scenario where income is down, you must have cash to cushion the ride. A good operator has multiple safety nets built in, all the way down.
In fact, I would advise that you ask any operator you’re considering investing: “what are you going to do to protect my investment?” (Note: Watch the accompanying video for more targeted questions you can ask to sniff out a weak operator!)
At NightHawk, we always have cash on hand. And if we have to stop distributions to investors for a couple of months to preserve the property and protect our investment, we will. Our investors are not going to lose their capital. Their wealth, their principle, is still safe.
The NightHawk Difference
A strong operator is all about the players, and we have assembled an excellent team here at NightHawk Equity. We’ve been around the block long enough to have stumbled, and realize where we were weak.
We got stronger by bringing in experts to handle key parts of our business. Let me introduce you to these key members of my team:
Daniel Simpson has decades of asset management experience on very large portfolios. When we were getting to know each other, I was floored by the questions he asked me about how we managed our properties; things I just didn’t know to do! Daniel focuses on strategic business forecasting, budget allocation, complex data analysis, property financials, and reporting at NightHawk.
Garret Lynch focuses on acquisitions. He handles all sourcing, underwriting, due diligence, and closings. He has been in the multifamily space since 2011, and even co-founded a firm that grew to 3,400 units and 125 employees before successfully exiting and joining our team.
Bronson Hill, who you recognize from our videos, is the Director of Investor Relations. He takes care of our investors, educating them on new acquisitions and updates on assets already in the portfolio. No bystander to investing, he is an active GP in over 700 multifamily units.
It’s amazing the expertise, professionalism, and level of high standard these individuals have brought to the table. You really only make the money if you execute the business plan that meets your projection, and I think the key really is the quality of the people that you surround yourself with.
I invite you to get to know us better! Head over to www.NightHawkEquity.com and check out our bios and track record. While you are there, you can schedule an introductory call to join our investor club.
See you on the next video!
