All Forum Posts by: Ellie Perlman

 I'd recommend - spend time to educate yourself, then go bigger! 

@ Sam Wocelka - the first question I'd ask is do you want to ACTIVELY or PASSIVELY invest, meaning, do you want to search for deals, analyze them, place debt, manage them, etc. If yes, then start with deals that you are able to buy with your net worth. If no - then I'd suggest to invest in several deals with syndicators and spread your risk.

I like the Red Bird mall and Fort Worth areas. Downtown and North Dallas are very competitive right now, and returns are in the single digits (for Class B properties). My company plans to buy and hold for 5 years, then sell. I know some other more remote areas have higher yields, such as Tallahassee, but I prefer to get 15% IRR within the DFW MSA, where I believe it will do better in a downturn.

There are many things to look at. Cap Rate is only one factor, and imo not the most important one. Among other things, my team and I are looking at:

- current vacancy (higher or lower than market? why?)

- rent comps: are rents under, at or above market (so we can see if we can raise them)

- deferred maintenance (so we can budget for it)

- vale add plan (can we renovate the property and raise rents?)

- sale comps: how much nearby properties have been sold recently (looking at cap rate as well).

- location! 

- what loan/term we can get (it can make or break a deal)

- what other paid amenities (washer/dryer, reserved parking) and services (view or location premium, pet fees, etc) can we add to increase NOI (net operating income)

The reason why I am not focused on cap rate, is that if we improve the property and raise rents, cap rate can change in 12-18 months. So it's one factor we look at, but it's not everything.

Hope that helps!

Ellie

I agree with what was said here. I am a syndicator and a passive investor, and don't offer deals without preferred returns or invest in deals that don't have it. Waiting for good deals is the best way to go, and in today's market it takes time. Buying class A low yield deals is easy. But getting high returns is not.

How Do You Make Sure You Invest in A Strong Real Estate Market?

When you consider investing with a Lead Investor in a certain market, you must evaluate how strong the market is. Don’t let the flashy OM (Offering Memorandum) fool you. You absolutely have to know the market. It seems like a lot of work but, in the Internet Age today, the information is at the tip of your fingers. All you have to do is know what you are looking for. In this article, I will lay out the critical factors that will help you determine what to look for, as well as where to find the answers.

Let's start with the five main factors that you must take into consideration when you evaluate a market:

• 1.Population growth – A solid market is one that has population growth. Markets that have flat or negative population growth can indicate a problem, while markets that continuously have people moving into them is a sign that there will be more demand for apartments. One of the markets with the highest population growth is Dallas, TX, while the Providence, RI market has shown no significant population growth at all.
• Where to find information?
• Simply google it! For example, search “Jacksonville population” and you’ll see the trend. Focus on the last 5-10 years.
• 2.Job Growth – Population usually follows jobs, and a great market is one that adds many new jobs each year. I usually look for markets with an unemployment rate that is lower than the national average (4.1%). In addition to evaluating the city job growth, you need to pay attention to any major industry or employer that may be responsible for more than 25% of the market, because if the dominant industry or employer is in trouble so is your property (due to layoffs). A solid market is one that has steady job growth and a diverse economy.
• Where to find information?
• www.city-data.com and www.census.gov.
• 3.Rent Growth – A strong multifamily market is a market that has increasing rents. If rents are in a downward trend, then your property might suffer from declining rents as well. This is also a rule of thumb, and each investment is unique, but general speaking I try to stay away from markets that have a declining rent trend.

Where to find information?

www.census.gov has information on the average rent in the past several years in major cities.

• 4.Appreciation Potential – The lion share of the profits is made when you sell the property. This is why appreciation is key. I look at markets that have strong appreciation potential, and if property values are increasing, it is more likely that I’d be able to sell my investment at a significantly higher price than when I bought it. This is why I believe that you make money when you sell a property, not when you buy it. A word of caution, though: real estate is a cyclical business, and even markets with strong appreciation can suffer when the economy turns. A market with increasing prices is not a guarantee that you’ll make profit when you exit, but it’s a safer market to be in when you buy.
• Where to find information?
• Many large brokerage firms offer free reports that show rents and real estate prices. You can find the reports from reputable companies such as CBRE, Marcus and Millichap, Yardi Metrix, etc.

• 5.Landlord Friendly State – Landlord-friendly markets have a direct impact on real estate and the return of the investments. Some states, such as California, are very tenant-friendly, which means that it can take up to 9 and even 11 months to evict an unpaying tenant while, in the meantime, you pay for the mortgage and the expenses. Other states, such as Texas and Florida, are landlord-friendly and provide owners with a quick eviction process.
• Where to find information?
• Simply Google: “How long does it take to evict an unpaying tenant in …”
• Summary
• All in all, it might take you 1-2 hours to gather the information, but while there’s a chance it might also be in the Lead Investor’s package, it’s always good to do your own research. At some point, you will become knowledgeable in certain markets and that knowledge will give you the confidence to invest alongside a Lead Investor.

Attend events, meet syndicators and investors and see who is in need of what you're good at.

I think OppZones create a huge buzz, but many investors don't understand the risk involved with it. As a former real estate lawyer, with a lot of experience in regulation implementation and working with regulators, I will advise you to examine deals positioned in an OppZone very carefully. I wrote an article about it on Forbes, and basically said that something to consider is the fact that we’re in the midst of a very long cycle, and we’re probably approaching the tail end of a great expansion. If you’re planning to invest in an Opportunity Zone, be sure you question whether your investment will perform in light of a worst-case scenario. Bear in mind that many Opportunity Zone areas are in low-income communities, where there is economic distress.

One way to analyze investment potential in a worst-case scenario is to convert different possibilities into hard numbers. As an example, if the property is located in an Opportunity Zone and the potential returns look great with a 5% vacancy rate, run the numbers and see how it will perform with a 10% vacancy rate, or if rents will not increase for a few years. Is the opportunity still profitable, do you break even or lose money? You need to have profit to enjoy special tax incentives, like those that the Opportunity Zone program offers. If the opportunity is not profitable, then you are seeing losses and the tax breaks from the Opportunity Zone program are not as great an incentive or as helpful at that point.

Smart investors realize that, as with other areas that undergo refurbishing and renovation, the properties surrounding the Qualified Opportunity Zones may present attractive investment opportunities as well. Hence, don’t exclusively focus on Opportunity Zone areas. And when looking at properties within an Opportunity Zone, be sure to look at the median household income of the area to make sure that the tenant base is solid and there is rent and job growth in the market.

Location is still key when it comes to real estate investing. An investment in a bad neighborhood will not make it a great investment just because it is eligible for Opportunity Zone tax incentives. A colleague recently reminded me that another risk facing investors is finding a fund manager who understands how the program works. Due diligence is needed, and vetting the qualifications of the fund manager is critical, especially since this program is relatively new.

As a buyer, I can tell you that it definitely is a red flag. When a property is retraded, I always ask myself:

- is there anything wrong with the property, especially a structural issue?

- is the seller unreasonable/extremely hard negotiator? 

- has the seller presented an incomplete information (e.g. bringing in tenants without background check to increase occupancy and revenue or offered very high concessions right before the sale, and the buyer found out about it)?

It could also be bad luck or a buyer that couldn't close. I just don't know, but I'm not taking any chances. I also think about my exit strategy and will I encounter similar issues when I'd want to sell (having difficulties selling because of property issues). Always think as a buyer AND as a seller when you buy a property. 

A side note re "good numbers" - every deal can look good if your assumptions are unreasonable, so I never rely on outside underwriting and always run every deal by my team. So, even if a deal is presented as a good deal, it may not be (unfortunately, I see too many of those deals today).

Hope that helps.

Ellie

Every lender wants to guarantee their loan, even in a non-recourse loan. It would require a net worth = loan amount and liquidity = 9-12 months of debt payments.