What does a good deal look like?
We are fortunate to live in a time where opportunities for investing are found quite frequently. At the moment, despite general economic uncertainty, many of the nation's growth markets are exploding. The challenge is, especially for the inexperienced, how do I tell a good deal from bad? What does one look for other than the promise of "good returns"?
When it comes to real estate, specifically in the multi-family space, there are two main aspects to consider: 1) The quality and trustworthiness of the sponsor of the investment and 2) The foundation and details of business plan for the management of he asset. Let's investigate further:
1) Evaluating the sponsor or the "manager" of the deal - most would argue who you are working with is just as if not more important than the details of the asset you're looking to invest in. Here are a few critical questions to ask before jumping in - if any of them are not answered to your liking, dig deeper and if still not to your looking it may be time to move on.
What is his or her track record? How long have they been investing?
Do you have any partners? How many deals have you done together?
Who are the members of the team? What role will each of them play?
Tell me about a situation when things didn't go as planned? How did you recover?
What markets are you investing in? Why?
What types of assets do you typically look for?
What are your typical fees or profit splits on a deal?
What is your minimum investment?
Can you provide references to prior or current investors?
2) With regard to the deal itself, there are some obvious and not so obvious questions and considerations to be revealed prior to signing on to a deal. The follow is a "quick" list of questions to ask, keep in mind this is only the surface and I recommend reading much more into this topic. For those interested, in learning more I highly recommend Brian Burke's book "The Hands Off Investor", it's a great read.
What market is the asset located in? Why do you like that market? What are the key
indicators around job growth, population growth, medium income:rent ratio?
What is the targeted internal rate of return (IRR)? What is the expected cash on cash return (cash flow)?
What is the business plan for the asset to improve or stabilize income?
What assumptions are made for projections in rent growth? Were they verified with market comps?
What capital improvements are planned? Were the amounts verified with quotes from contractors?
Have the planned/estimated expenses been verified with actual quotes or contracts?
Who will be the on site property manager? What is their track record?
What assumptions have been made around the exit criteria for the asset?
What are the key risks? How will they be mitigated?
How often will you or a member of the team visit the asset?
What financial reserves are in place in the event of a downturn?
As mentioned previously, these are a only sampling of questions to ask prior to diving in head first into a deal but I strongly recommend pursuing your own education further in addition.
Real estate investing is very much a relationship business built on reputation - it takes many years to build the foundation and only minutes for it to come crumbling down. Those that are serious about building a true partnership with their investors (like us!) will take as much time as needed to property educator our investors.
Final advise: take your time to understand the opportunities as they arise, ask the right questions using the guide above as a start (as many as needed), and take the time to educate yourself and you will have the odds in your favor.
To your success,
Founder and CEO
Redline Equity, LLC