So, you understand the benefits of multifamily as an alternative to the stock market, and you’re ready to consider potential investments. What do you need to learn before you get started? What questions should you be asking the sponsor? What are the top concerns you need to think through before you put money in a deal?
As Warren Buffet famously said, “Rule #1: Never lose money. Rule #2: Don’t forget rule #1.” Your top concern as an investor is capital preservation. And while apartment buildings are a relatively safe investment, your priority is to consider the downside of the deal the syndicator is pitching: What are the risks associated with this particular property? What is the sponsor doing to mitigate those risks?
An honest syndicator will be able to articulate potential problems and discuss how they might handle any issue that comes up. For example, if the local economy were to take a hit, many class A tenants would shift to class B. How would this impact vacancy? Your syndicator should understand how the property would perform under different circumstances and have a contingency plan in place.
If the syndicator is not setting realistic expectations, be cautious. It’s bad enough when you don’t make as much as you expected. But it’s much, much worse to end up with less money than you started out with.
REAL ESTATE EDUCATION
The next thing you should consider is your own understanding of multifamily investing. While it isn’t necessary to become an expert in the space, you should educate yourself enough to know how to vet a sponsor and what to look for in a deal.
Get familiar with the terminology and learn what questions to ask the syndicator. Learn the pros and cons of different asset classes and familiarize yourself with the best markets for multifamily. One of the easiest way to get comfortable with the basics of investing is through podcasts like The BiggerPockets Real Estate Investing Podcast, the Old Capital Real Estate Investing Podcast, and of course, Apartment Building Investing with Michael Blank.
VET THE SPONSOR
Another aspect of multifamily investing that should be a top concern is the integrity of the sponsor pitching the deal. Before you go into business with someone, take a close look at their track record. How much experience does the syndication team have? Do you like and trust them? Contact their references to get a feel for their reputation in the community.
It’s also a good idea to find out whether they have similar types of properties in their portfolio and prior experience in that particular market. Ask for the details of their past deals and the accuracy of their projections. Have they had a deal go bad in the past? How did they handle it? Ideally, you want to work with a syndication team that has dealt with challenges and come out on the other side.
Perhaps the most crucial trait to look for in a deal sponsor is strong communication, otherwise known as investor relations. What is their communication schedule for keeping you apprised of the investment’s performance? And will they inform you right away should things not go according to plan?
THE INVESTMENT ITSELF
As you scrutinize the deal itself, consider whether it’s a fit for your financial goals. Is appreciation more important to you? Or the property’s current return? Your answer will determine whether you choose a core plus or value-add investment strategy. Look at the market and the asset class through the same lens: Would you prefer a stable market or one that’s hot right now? Luxury apartments or a class C property in an up-and-coming neighborhood?
In talking with the sponsor, discuss the minimum required investment, how long they plan to hold your money, and the expected rate of return (cash-on-cash and overall). Be very careful to ensure that the sponsor has been conservative in their underwriting, leaving a cushion for unexpected expenses. If they are promising you a 20% average annual return, their underwriting may be too aggressive, and it is highly unlikely they will be able to deliver. And last but not least, the syndicator should have a credible exit strategy and a plan to return your capital by way of an outright sale or refinance of the property.
If you concern yourself with securing capital preservation, learning the fundamentals of multifamily, and carefully evaluating the sponsor and the investment itself, you’ve got the bases covered. To learn more about investing with us, visit the Nighthawk Equity site to see our portfolio and receive additional information. We want to help you achieve your financial goals with multifamily investing!