Do you have an interest in multifamily investing, but don't know how to properly evaluate a deal?
Today, we’re going to share effective ways to tell if a multifamily investment can be a solid investment.
How to Evaluate Multifamily Deals
When we look at apartment buildings, there are three clear-cut things we look for, and they all have to do with GROWTH.
First, we look for population growth.
We want to know if people are moving into that area. More people in the area means, more people looking for apartments.
Next, we look for income growth.
Are salaries going up in that area? Higher salaries mean people can pay rent.
And lastly, we look for job growth.
If employers are moving in, they will create new jobs, which will drive people into the area and those people will need a place to live.
It's simple. If we see those things, we know that we have a solid lead on finding a good multifamily market to invest in.
In addition to the underwriting style of the sponsor, these are good macroeconomic details to look into.
Key things to make sure the deal is solid with minimal risk.
Warren Buffett is famous for saying, Beware of nerds with calculators, which is a funny way of saying, I can make my financial model say anything.
If you don’t want to deceive yourself with your financial model, keep your assumptions conservative. We're always fighting through this in our models.
You don't want to just tell yourself, through rose-colored glasses, this is going to be a great deal. You want to stay disciplined and examine what's really going on.
Here are three ways that we do this:
We keep our exit cap rates fairly high. That means that we're not assuming the world is going to continue to grow at a huge fast pace.
We look at the cost of renovations. Especially in this inflationary world, we need to underwrite deals and expect it to cost a lot of money to renovate units.
We look at the annual rent escalators. There has been huge rent growth over the past two or three years, but we know historically, it's much lower.
We don't want to assume that the last two years are representative of the next 510 years, we're gonna look like we want to go in those more conservative historical growth rates.
You can make a good investment.
If you use these underwriting metrics conservatively, combined with today's fast-growing market, we think you will have a good shot at making a good investment.
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