The Secret to Eliminating Competitors in a Hot Real Estate Market
How do you approach finding, underwriting and acquiring real estate deals when there’s so much competition in your market, niche, etc. that you cannot find a deal at a price that will meet your investment return goals? This was the exact situation that my apartment syndication business faced in mid-2017. We had a lot of leads coming in that met our investment criteria, but the competition was such that the purchase price kept creeping higher and higher until the deal was projected to achieve returns below that of our passive investors goals.
So, what did we do? Like any effective entrepreneur, we went into problem solving mode. More specifically, we reassessed our investment criteria.
Our standard investment criteria for initially screening deals is:
- Was it built in the 1980s?
- Are there 150 or more units?
- Is it in or near a major city?
- Is there an opportunity to add value?
If we cannot answer yes to these four questions, the deal would automatically be eliminated from contention. Normally, we didn’t have much of an issue finding and purchasing properties that met this criterion. However, as of late, we have. In particular, we had a challenge finding solid investments built around 1980, mostly due a high level of competition. So, we took a step back and began reviewing properties that were built much later. And as a result, we purchased an apartment community built in the 2000s for the first time.
We typically look at properties built around 1980 because we are value-add investors. Generally, anything built earlier than 1980 would be to distressed to fit into our value-add business model. Conversely, anything built later than the 1980s wouldn’t have enough value-add opportunities to meet our investment goals. Or so we thought.
After reviewing all the potential deals in our pipeline, regardless of age, we realized that these newer deals – the ones built between 1995 and 2005 – were actually projecting returns similar to those of the 1980s apartment communities. Generally, since they are newer buildings, the opportunity to add value was lower, but that was offset by the reduction of certain expenses, like ongoing maintenance, management issues, vacancy rates, resident turnover and overall risk.
I think the reason why, in our current market, 1980s properties have comparable returns to 1990s and 2000s properties is because value-add apartment investors are conditioned to make the former property type a priority. Most wouldn’t even look at communities built in the late 1990s or early 2000s because they think the numbers won’t work as well because there will be less opportunity to add-value. However, we were able to apply our value-add investing knowledge to a property built in the 2000s and create a business plan that would enable us to achieve the desired returns of our passive investors. Whereas most investors pursuing deals in this age range aren’t looking at them through the value-add lens, we were able to identify areas that could be improved that the other, non-value-added investors had missed. In other words, we leveraged our unique skillset (understanding how to recognize opportunities to add-value) to defeat the competition and be awarded the deal.
So, if you are having trouble finding deals that achieve your desired returns, reassess your acquisition criteria. Start looking at deals that fall outside your criteria and see if you can project similar returns. You may end up discovering what we did, which will lower your risk in the deal since it is newer and comes with lower risks and ongoing expenses.
All that being said, our priority is still properties built in 1980. And we’ve only purchased one apartment community outside that range. So, we’re keeping our eyes out for our initial criteria but also now acknowledge that sometimes it makes sense to upgrade, especially when everyone else is looking at the same types of deals as us.
What techniques have you applied to your real estate business that enabled you to navigate a competitive market and find deals that meet your investment goals?
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