I find myself regularly asking my Investor friends and new Investors, what their investor criteria is, and while I like the idea of sending a web form for them to fill out, I prefer to have a conversation, or at the very least have them email me all the deets. The reason for this is that while an Investor may have a basis of criteria for metrics like Internal Rate of Return (IRR) and Cash on Cash (CoC), the markets change due to socio-economic, socio-political, industry changes, and wildly unexpected changes to society as a whole, like the COVID-19 pandemic. But even the conversation is not enough because invariably, the Investor only touches on their top metrics instead of giving me a deep-dive. The more detailed Investor Criteria I have, the better I can serve my Investor clients and help them solidify a plan that is strategic and based on real data vs ideal returns. Here are some guidelines for defining your deep-dive Investor Criteria:
MSAs: Know the Market Statistical Areas (MSA) you choose to invest in, even if you’ve only done a little research. Narrowing-in on the MSA will help you identify the performing assets and demographics in that area.
Property Type: As much as you should know your MSA, you should also know your property Class. Classes range from A-D, with Class A being luxury or the high-end, service oriented property with a long list of tenant amenities. Class D on the other hand is a worn down property, requiring a great deal of maintenance or even a potential tear-down. The sweet spot is the Class B & C properties that need up to 50% of the units improved or that is at least 90% occupancy, but may need to be better managed.
Opportunity Type: While many Multifamily Investors love a great Value-Add investment, you may want a Full Reposition or Conversion.
Deal Price Ranges: Now how much you’re willing to spend. If you are the sole buyer or if you are partnering with others, you are bringing capital to the table. If it’s All Cash, fine. But be prepared to take the risk with that much capital, and to be held accountable for your partners capital.
Minimum CAP Rate: This tends to be a big focus for Multifamily Investors, but it’s not the be-all end-all. The CAP Rate tells you the risk of the asset and its potential return. The lower the CAP, the lower the risk, the lower the returns, and the higher the CAP, the higher the risk, the higher the returns. When buying a property that’s Turn-Key over Value-Add, the focus would be on a higher CAP. But expect a Value-Add CAP to be lower, especially if the asset has a lower than MSA Vacancy Rate.
Minimum Hold Period: How long you hold an asset is directly related to your preferred returns. A common Hold Period is 5 years, at which time the property is refinanced so the Investor can acquire more properties. But the markets shift, and it may be necessary to sell in year 3 or hold it until year 7 if that will give you and your partners a preferred return.
Acquisition Loan Terms: Well, you need a lender to know your loan terms, right? Before you start shopping for deals, but after you’ve researched MSAs, build a lender list of preferred lenders. This list should include a Fannie/Freddie lender as well as several Private Lenders who may have higher rates, but are willing to fund the newer Investor. Once you have your lenders criteria, you can utilize it in your deal analysis, choosing the best lender for the deal.
Refinance Loan Terms: The same goes for your refinance lender, and they may be different from your acquisition lender. You might be able to get into a deal with Interest Only for the first 2 years, but that lenders refinance product is not that attractive. You can wait until you get closer to refinancing the loan to find this lender, but pay attention to what lenders who are offering refinancing are doing. They compete in this space because of the longer term on the loan, so look for the ones who are offering great refinance deals and keep them in your back pocket when it’s time to make some moves.
These are just some of the Investor Criteria that should be considered in your Real Estate Investing Plan. There are several other metrics, many of which are unique to your overall financial position, risk tolerance, and level of knowledge and skill as an Investor. For some, you may need to start with the smaller Multifamily properties that don’t rely on the more complex metrics that apply to a Syndication, but you still need to have an idea of the total cost, projected internal and external return rates, and the risk you are willing to take with your existing capital.
To help you with your real estate investing, contact me today at 310-383-7393 or [email protected] and I’ll help you define your Real Estate Investing Plan to Create Wealth through Real Estate.