The national apartment market has shown itself to be exceptionally durable in the face of COVID-19. When we first began experiencing shutdowns, there were talks of being able to find deals easily due to highly discounted properties. Because the multifamily market is so strong and because the interest rates have been pushed so low, we are seeing the opposite effect. Property prices are increasing, and the market is becoming more and more competitive.
In such an environment, it is necessary to remember some fundamental components of acquisition preparation and execution that all buyers should heed. Five of the most notable are outlined below.
1. Do Our Homework
We cannot do too much due diligence when evaluating a community before agreeing to acquire it. As the buyer, we need to know a property is poised to deliver the returns our investors are seeking. If the community currently isn’t in shape to deliver those returns, we have to know what steps are needed to position the property to do so.
We must dig deep. We perform internal market studies and review all the pertinent comps (comparable properties) in the submarket, both for monthly rents and investment sales. We perform an exhaustive study of the surrounding submarket. The quality of nearby schools, the vibrancy of area retail centers and entertainment options, and the health of the job market are all factors that come under scrutiny. We have our staff walk every unit when we do on-site visits. We also commission third-party engineering and environmental studies. This is not only a great benefit to a prospective buyer like us, but our lenders require it.
Evaluating a community’s competitive set can be a tricky process. We, as the prospective buyer, exhibit extra thoroughness in this area. We never make assumptions. Because if we do, we could miss out on the full extent of the competition’s holdings.
In summary, to avoid surprises and disappointment, we do our homework. And when we think we’ve completed our homework; we do some more.
2. Secure Options for Debt
When it comes to obtaining debt financing for an acquisition, it pays to have options. That way, we can be sure we’re securing capital in the most cost-effective manner.
We like to have multiple choices for each debt financing opportunity. We use debt brokers to take our properties out to the market to solicit multiple bids and call on our numerous relationships with agency lenders, private lenders, and life companies. Nurturing relationships with debt brokers are as important as the relationship we build with property brokers. While we rarely meet our debt brokers face to face (as we do with our property brokers), the relationship is still vital. We do not have one simple dedicated lender source. We like to spread it out, so we don’t put all our eggs in one basket.
3. Establish Our Deal Breakers
When evaluating an apartment community for purchase, it is critical to identify the factors that would make us walk away from the property. For many owners, factors such as the condition of local schools and the surrounding job market are typical deal-breakers.
One of those deal-breakers can be current and projected real estate taxes, which buyers sometimes do not consider carefully enough. We are extremely cautious when it comes to these taxes because if not budgeted for properly, they have the potential to seriously diminish returns.
4. Be Conservative in Our Underwriting
We are cautious and pragmatic in our projections of a potential acquisition’s revenue growth and returns. In today’s competitive market, buyers often feel pressure to get aggressive in their underwriting, which will pave the way for returns that disappoint investors. Sellers have been fortunate in recent years in that they can simply choose between four or five qualified buyers who are offering extremely high purchase prices. Unfortunately, to reach and justify these high prices, some groups are creating pie-in-the-sky underwriting.
Similarly, buyers sometimes do not sufficiently fund their capital expenditure (CapEx) reserves. We take pride in knowing that, no matter what might happen, we will be in good shape whether the real estate world blows up tomorrow, there’s political angst or something happens on the world stage that affects the real estate sector.
5. Don’t Skimp on Property Management
While we are not “fully integrated” we work very closely with our property management companies to a point where it is as close to vertical integration as possible. We view this relationship as a partnership. From the very beginning of the process of purchasing a property, we are working closely with the property management to make sure that our assumptions and their projections are aligned.
We use the management company with the greatest knowledge of the submarket. We do not use management companies that own their own properties, and we do not use management companies that are invested financially in the property. We do this so that our property does not take second place to a management company’s own property in terms of staffing or marketing. Plus, we do not want them financially invested so that if we are not satisfied with their performance, we are free to make the necessary change in management.
We also realize that going for the lowest-cost property management firm can be a shortsighted decision. An ineffective manager can have an extremely negative impact on a community’s operations, which, in turn, harms operating fundamentals, revenue, and returns. We prefer to build a relationship based on the management companies’ performance and our ability to grow our portfolio. We want companies that want to grow with us.
We place as much scrutiny and value on who’s managing our property as our investors do in who’s managing their equity. The choice of a property management provider deserves serious attention and consideration.
A comprehensive acquisition process can be the difference between a great deal and a so-so deal. We leave no stone unturned to ensure the numbers we present to our investors are the numbers we deliver.