How to Quickly Evaluate a Multifamily Deal
Here are the 3 factors that you need to look at in order to quickly evaluate a multifamily deal prior to conducting more detailed, thorough due diligence: (1) the market, (2) the deal, (3) the team.
When evaluating a multifamily deal, the first factor you want to look at is the market.
First, you want to make sure that the market has a diverse economy. In a diverse market, no one employer or industry should make up more than 25% of the jobs in that market. When one company or industry makes up the majority of jobs, if that company moves or if that industry takes faces any sort of challenges, there is a possibility that the entire market tanks, and with it, your real estate investment. Therefore, avoid non-diverse economies as much as possible.
Secondly, take a look at the employment and unemployment rates. Is there a positive or negative trend? If the employment rate is increasing, then compare it to the rates of similar cities across the nation. Is the employment in your market increasing at a faster or slower rate? A positive trending employment rate overall, and a rate that is increasing at a faster pace when compared to cities in similar markets are signs that you are investing in a solid, growing market.
Obviously, when evaluating a multifamily deal, you want to look at the deal itself. Make sure that you are conservatively underwriting the deal.
First, take a look at the trailing 12 to 24 months profit and loss statements (P/L statements), and use that to underwrite the deal.
Next, apply the P/L statements to how you would operate the property. Many investors just stop at underwriting the deal using the current P/L statements. However, this only works if you will be operating the property the exact same way as the current owners. In reality, you may be owner operating the property while the current owners utilized a 3rd party property management company. Or you may be allocating more or less money towards the capital expenditures budget. All of the differences must be taken into account when you are underwriting the deal.
Finally, you want to make sure that your team has experience in this specific real estate niche, and that there is an alignment of interests. There are many ways to have alignment of interest, with the best way being that the team members are co-investing in the deal.
Question: Before conducting more detailed due diligence, what do you do to quickly qualify and evaluate a potential real estate deal? Comment below with your strategy!