Introduction

When defining your investment criteria, the main thing that we should have is “Clarity.” Like anything in life, if you don't have clarity around what you're trying to do or accomplish, you will likely have difficulty achieving your goals.

Many investors dive straight into this business without much prior real estate experience and simply start looking for "good deals” but they don't know what the key indicators of a “good deal” actually are.

So Let's start off with a few questions then we can drill down from there. What kind of Real Estate are you looking for? Multifamily, Retail, Office, Industrial, or Self Storage? What size? (How many units?) What Vintage? and most importantly, What is your business plan? We have chosen the Multifamily sector and the details below will help you further define your investment criteria if you haven’t already.

Active or Passive?

Passive
When you are evaluating a sponsor as a Passive Investor, you want to know what kind of deals these sponsors are bringing forward as investment opportunities and whether they align with your investment goals. Access our Passive investor Due Diligence Checklist; “99 Questions to Ask Before Investing in a Syndication” to help you decide if an investment opportunity is right for you.

Active
As an active investor, you will spend a decent amount of time networking with brokers in your potential investment markets. Those brokers need to know your criteria so that when they have a deal that meets your benchmarks, they know to call YOU straight away.

Whether you are going to be an Active Investor or a Passive Investor, there are multiple factors that you need to consider when defining the criteria of what type of deals you're going to look at. As outlined in our Multifamily-101, Guide to Getting Started Investing in Multifamily Assets. those deal types are cash flow, value-add, and a hybrid of both.

Cash-Flow or Value-Add?

Cash-flow deals are good for long-term stability. If you are looking to replace your income, cash-flow deals are great options.

If you don't need imminent cash-flow, but would like high appreciation on the backend, value-add deals are going to be the most advantageous to your investment goals.

Ultimately, there is “The Hybrid.” It has the best features of both cash-flow and value-add components. If you are looking for a deal that has some cash-flow but also has upside on the backend, then you may want to look at deals where both components are inherent. For access to our current deal flow Drop Us a Line or Join Our Investor Network.

Location

If you have not already posed these questions, then here is a good starting place:

• Are you investing in your backyard?

• Are you investing in primary, secondary, or tertiary markets?

• What are the job growth metrics?

• What is the median home price?

• What is the median income of the submarket? Is it more than two times the asking rent?

• What is the rent competition like on the immediate surrounding deals?

You need to evaluate all of these metrics to know whether you are on the path to progress. Ask the numbers; Is this market on the incline or on the decline?

Personally I like to buy in landlord-friendly states. Groundswell Assets targets the sunbelt region; Arizona, Texas, Tennessee, Alabama, Florida, Georgia, and The Carolinas. All of these states are landlord-friendly and allow us to purchase deals that meet our and our investor’s investment criteria. At Groundswell Assets, we invest where we already know our “secret sauce” value-add plays can be put into effect. We have teams (Brokers, Property Management, Attorneys, Lenders and Insurance companies) in each market, which gives us a competitive edge when we submit offers on the deals.

Price

Knowing what price you're capable of paying is going to be a major factor in what type of deals you are looking at. The best way to scale your buying capability and to be able to look at bigger deals is to build partnerships. The multifamily real estate business is a team sport, and if you are not building a solid network around you from the outset, then success and scalability will be difficult to achieve…Unless you are a unicorn. They do exist!

Loan

The type of lending options that your PFS (Personal Financial Statement) is able to facilitate for buying your next multifamily deal is a major part of defining your criteria. There are two categories that commercial loans fall into: recourse and non-recourse. You and your partners will need to know what type of risk you are willing to take on when choosing a loan product.

Vintage

The vintage of the deals you are analyzing plays into which class they fall. Class type is a good indicator of what type of loan product you will be able to use when making the acquisition. For instance, looking at a 1969 vintage with flat roofs in a secondary market with a large list of deferred maintenance is not going to be as attractive when bringing the deal to your preferred capital partners.

Physical Attributes

You need to know what kind of properties you want.

• How many units are in the deal? However many units are there will determine if you have on-site management or offsite management. Know how you plan to manage the deal. Will you be using a third-party property management company or self-managing? Knowing this beforehand will affect how many units you're choosing in the deals you're looking at.

• Do they have flat roofs or pitched?

• Is the plumbing cast iron or is it schedule-40 PVC?

• Are the electrical components aluminum or copper?

• What Kind of Circuitry?

  • General Electric NoArk Electrical panels

  • Stab-Lok

  • FPE-Stab-Lok

  • Unique Breakers Inc. or UBI

• Are there plenty of amenities on the property that are going to attract potential tenants?

• Is this property not the type or in a neighborhood where these types of attributes are found to be a necessity by your prospective demographic of the tenant base?

Class

Is it an A, B, C, or D class property?

A-Class Properties:
Characteristics are;

• Less than 15 years old

• It's a new property and has professional working-class tenants.

• This type of property is going to have low deferred maintenance but usually comes with a higher price. You're not going to be getting in there and rehabbing all of the units. It is likely you will come in and try to refine management inefficiencies to boost the NOI. A class deals fit into the cash-flow play category.

B-Class Properties:
Characteristics are;

• 15-30 years old

• Semi-new properties and they also have professional tenants.

• You will be looking for management inefficiencies but might have the opportunity for a little bit of a rehab and renovation play here to modernize and update the units. In this “Hybrid Model” You will be able to boost rents and force the appreciation for sale at the end of your holding period of typically 5-7 years.

C-Class Properties:
Characteristics are;

• More than 30 years old

• Blue-collar working-class tenants

• Expect to have multiple deferred maintenance items on these deals.

• Look for aged plumbing, outdated HVAC, and electrical systems.

• Often there are issues with the roofs that you will have to either fix or replace completely

• The exterior and landscaping are going to be worn down and the amenities may or may not be present.

Coming in with a heavy value-add plan is where are you going to make-or-break these types of deals. Heavy value-add deals require an experienced operations team who has executed these types of business plans before.

D-Class Properties:
Characteristics are;

We recommend that you stay away from D Class deals.

• They are in very rough areas of town commonly known as “warzones.”

• Look for these buildings to be abandoned and boarded up, or have very low-income and high-risk tenants.

• These deals are usually found at auction or require an all-cash purchase.

• Due to the number of deferred maintenance issues and heavy renovation requirements to bring them up to a livable and safe standard, they most likely won’t have any cash flow on day one.

However, there are times that this could be beneficial being that they are in what is referred to as “opportunity zones” more on this in another post.

The main points of Qualified Opportunity zones are;

1. Tax credits

2. Potentially on the path of progress, where the government is attempting to stimulate the economy by incentivizing investors and developers to raise the class of the neighborhood through investment.

Be very careful investing in D-class properties because there is a high risk, but if you know what you're doing that could also mean a high reward.

Exit Strategy

Knowing your exit strategy is one of the most important things in all of your buying criteria. Do you plan to fix up the units and go for a quick flip? Or do you plan to buy and hold as we do? We like to stabilize the asset and refinance so that we can give our investors a large portion if not all of their initial seed capital invested back to them. Our Investment strategy enables passive investors to roll their initial investment capital into additional deals and continue to scale. Our favorite strategy is to buy, rehab, refinance and hold deals forever while keeping our investors involved in the cash flow distributions and tax benefits into perpetuity, or until the markets are favorable for a disposition.

Conclusion

To find out more, or if you would like assistance defining your criteria, please don’t hesitate to drop us a line. We are always happy to talk about real estate and lend a helping hand in your multifamily investing journey. How can we serve you best today?