ANALYZING DEALS

In our discussion today, I want to address a cautionary tale of analyzing deals. This is where most investors get hung up. It's an interesting paradox in the analysis as there are multiple facets to every deal. What makes it a paradox is that analysis is a look both at past performance and future assumptions.

As a passive investor, it is important to understand how your sponsor underwrites their deals. This is the analysis portion of our story. You will be trusting the sponsors to perform on their assumptions. Please keep in mind that investing in real estate and any other investment comes with certain risks. The underwriting of the deal is one of the ways multi-family investors can determine and reduce risk in the deal.

THE MARKET

The first thing any good sponsorship team is going to do is analyze the market data around where they want to invest. What type of market is it? Is it a core market, a secondary market, or a tertiary market? Core, are markets with large populations, strong growth, strong labor forces, and solid education bases. Examples are Dallas, Houston, Austin, Atlanta, Chicago, etc. Secondary markets are typically larger cities with a good population of several hundred thousand to a million that have good growth potential, and solid labor forces with a base of an educated workforce. Examples of secondary markets may be St. Petersburg / Tampa, Montgomery, Greensboro, El Paso, etc. Finally, a tertiary market consists of smaller sub-markets with populations around the 100,000 mark, good jobs, and ok growth.

Once the market is identified, analysts must get into the neighborhood market within the 1, 3, and 5-mile radius of your subject property. What employers are in the area? How many permits are there out for the development of new multi-family projects? What is the demand for the area? What is the competition doing? Is there shopping, transportation, entertainment, schools, etc. in the immediate area? What type of walkability is there around the subject property? What is the local crime scene?

THE ASSET

Good underwriters and sponsors will start with the trailing 12-month income and expenses along with a current rent roll for the property. This is a look into past performance. We are looking for management inefficiencies and areas for improvement. We're looking for large expenditures throughout the year and want to know the story. We want to know if their marketing story matches the financials. How long has the current group owned the property, and what improvements did they make? What type of improvements were done? What type of improvements will the new owners need to make?

Are there opportunities for income? Can we add any amenities to the property that will generate revenue? Are the current rents at, below, or above the current market rents? Are residents currently paying their own utilities or can that be billed to them? Are there any vending opportunities such as laundry, drink or snack machines, parcel lockers, etc.? In this part of the analysis, we want to know what current collections look like for rent. Are there chronic delinquencies? Are there evictions coming? Did the current owners put people into the units just to sell the property, but neglected to secure background checks or security deposits?

Ultimately, as a sponsor, the ability to increase revenue and decrease expenses drives the value of the property. Our analysis must uncover these opportunities and also discover what has caused the current condition, if possible. Overestimating rent increases can blow future profits and the ability to refinance or sell at a value needed. Underestimating expenses can hurt your values. Overestimating expenses and being too conservative can also kill a potentially good deal.

Ultimately, as a passive investor, you want to align your investment with a sponsorship team you trust to perform on their assumptions. In real estate, nothing is certain and there are multiple unforeseen situations that can slow performance such as a worldwide pandemic, a major employer laying off a lot of workers, natural disasters, etc. When challenging situations occur, how will the sponsorship team communicate and perform under pressure? Perhaps you may need to forgo a couple of quarters of distributions to get things back on track. Ultimately, over time, real estate has strong rebounding effects causing recovery.

Remember, investing in real estate is a long-term investment. In some cases, you may see a return of your investment in a couple of years or it may take 5, 7, or 10 years. It is essential, as a passive investor, to understand your sponsor's strategy to protect your investment.

After the initial analysis that determines whether an offer is going to be made, there will be more and more data being analyzed throughout the escrow timeline. This is called due diligence. It includes inspections, lease audits, the sponsorship team walking every unit, business planning, contractor and vendor bids, property management budgets, onsite staff audits, maintenance audits, and so much more. Remember, the acquisition of multi-family investments is a full-time job for many of the sponsors out there. We take our work seriously and have a fiduciary responsibility to our passive investors, our staff, and our residents to perform at high standards.

Always take caution with your investments and know that looking into a future that is unwritten is called speculation. Sponsors take historic data on an underperforming asset and make assumptions based on experience and surrounding data to determine a future output. This is both a science and an art. Your investment is more in your sponsorship team than it is in the actual asset. Good sponsors know how to navigate and pivot when things turn sideways. Bad sponsors will be paralyzed in fear and risk your investment.

To learn more about deals we're working on, visit www.groundswellassets.com/invest to subscribe and gain access to our current deal flow. You'll gain access to our investment offering memorandums with proformas, underwriting, and any videos we may have put together for each deal we're working on.

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