Updated: Jan 9
Some syndicators believe it’s best to invest in multifamily properties that are close to home, because they are already familiar with the area, the competition, and usually have a network of real estate brokers and agents that can alert them to properties that will be coming available. On the other hand, there are tremendous opportunities to syndicate deals or invest in properties that are located out-of-state, due to surges in population growth, limited availability of higher end rental units in those markets, or a multitude of other factors.
Every syndicator has a different investment and business strategy. I look for value-add deals in areas with high employment numbers as well as sustained growth in population, jobs, and personal income. I also look for deals in landlord friendly states, where there isn’t rent control in place. I live in Southern California, and even though it’s the best place to live, I cannot say the same about real estate investments. Compressed cap rates, sharp market swings, and rent controls are only some of the issues real estate investors face here. I chose to buy in Texas, Florida, and Georgia and have been doing that for years.
Finding the Right Market
Once a property becomes available that meets my criteria, I do a thorough market analysis. That means a deep dive on the numbers for job growth, rental income growth, and an in-depth analysis of the market’s population makeup. Are there a lot of Millennials in the market? What about retirees? They’re both key renter groups and I want to be sure that the market has these groups available.
If you’re doing your own analytics, there are a variety of online tools available to you to make that job easier. To look at population growth and demographic makeup of a market, you can use www.census.gov, www.citydata.com, or even Google. Just plug in the market and type “population increases” or any other topic you want information on.
There are more advanced tools as well to see real estate appreciation and many other metrics, including CBRE, Millichap, Yardi Matrix, and VeroFORECAST. Each one provides key data that will help you in your analysis.
Also, I previously mentioned that one of my criteria was having a “landlord-friendly” state. That means in addition to not having rent control in place, I also look to see the laws governing eviction of renters who don’t pay their rent. The last thing I want is to invest in a state where it’s impossible to evict a non-paying tenant.
Create an Out-of-State Team
One thing I’ve learned in syndicating out-of-state deals is that you don’t want to do it alone. You need a professional team working with you that not only understands multifamily investments but knows the market you’re planning on investing in.
Your team should include a local broker, not only for their market knowledge and ability to find deals, but because they’re a good source for recommending other team members, including a lawyer and a CPA who understand out-of-state investments. They’re also a good source for recommending a local property manager or property management company.
Why a CPA and lawyer? Every state has its own laws and regulations relating to property ownership and property taxes, so it’s smart to have a local lawyer and a CPA on your team. They understand all of the local building codes and ordinances, which will come in handy if you’re going to do a value-add renovation to the property.
If you’re investing out-of-state, one of the first things to do is to hire a local property manager or property management company. They will really know the market and have a good understanding of all of its intricacies. You can get referrals from brokers and lenders that you work with in those markets. In addition to having a good understanding of the competition, the property manager or management company is responsible for keeping your vacancy rate low. They also understand what renters in their area want, and can offer suggestions to improve the property.
After getting a referral, one of the first things I do is to walk one of the properties that they manage. I want a first-hand look at how the property is maintained, and how they work with a prospective new tenant. When I do this, I often don’t reveal who I am or announce the fact that I’m coming. At other times I will set a specific appointment to meet with the property manager on premises so I can get a feel for how he or she operates. I also like to meet with the staff, including maintenance and rental agents.
During the hiring process, I’m looking to see what they are able to deliver. Can they provide weekly or monthly reports on vacancy rates, maintenance issues, or tenant problems? Are they able to track expenses and make recommendations on how to trim those expenses? Do they manage outside vendors properly? These are all key questions you have to ask in order to find the right property manager or management company.
There are other tasks that you’ll need to know about, including whether or not they are able to pay the investors directly from the monthly operating income. If they can, it’s a huge burden off of your shoulders. If not, perhaps there is something else they can undertake to help manage the property and the investment.
One thing I’ve found is that regardless of where the property is located, you have to be a present owner. I travel to each property quarterly, sometimes announced and other times I arrive unannounced. I walk the properties to check on its condition, and try to talk with tenants to get a feel for how they view the property manager. A first-hand review from the tenant’s perspective is extremely helpful.
Analyze the Deal
By now you’ve done a lot of work, including putting together a professional team, finding a local property manager, and analyzing the market. Now the work really begins, because you’re going to have to analyze deals to see which one makes the most sense for you.
There are some basic analytics to review, starting with the expense to income ratio. Another important number is the net operating income (NOI) of the property. That number will provide you with the total cash flow before your mortgage payments and taxes. It will also give you the property’s value and profitability, so it’s a critical number to have. The number will also provide a guide, prompting you to look for ways to boost the number, either by increasing the income through higher rents or by lowering expenses.
When looking at expenses, use the profit and loss statement provided by the seller. Look at each line item to get a good sense of where expenses might be higher than average. While you might plan to do a value-add to the property, analyze the deal using the current numbers instead of potential increases in rental income.
Another key is the Cap Rate, which provides you with a number of what your return would be if you paid cash for the property instead of financing it. The lower the cap rate, the more you pay. Higher cap rates often provide higher returns, but be cautious because a cap rate that’s too high can indicate a risky investment. The national average on cap rates is about 5%.
Some investors analyze the property from a pro forma perspective. Make different income projections based on reducing vacancy rates, and look at other income as well. Map out what the income would be if you added some fees, like preferred parking, storage, in-unit laundry faculties, pet deposits and club or fitness fees. These are all “what-if” scenarios, but it’ll give you a good idea of what type of income the property could potentially generate.
Do the same with expenses. Use the numbers provided by the seller for current expenses, and do some analysis based on your ability to lower those expenses. They might include insurance, debt service, leasing fees, maintenance fees, and other ongoing expenses. You can get some insurance quotes, for example, from competitors of your current insurance company. You can do this with all type of expenses to have a good handle on the different ways to reduce overall expenses.
Finally, take a close look at the property itself. While this isn’t a financial exercise, it’s equally important. For example, if there’s a very high vacancy rate, find out why that’s happening. If there are repairs needed, how many are immediate, and how many are long term? Answers to these questions will help determine if the property is viable.
Once you’ve decided to invest in out-of-state properties, analyze the market you’re looking at. Make sure it is a growth market, with increasing job growth, population growth, and the right demographics for the property you’re considering. Put a professional team together, that includes a local broker, lawyer and a CPA, along with a property manager or a property management company. Analyze the deal; running the numbers to make sure the deal makes economic sense. Finally, visit the property and meet with the people who are involved. If everything points to a positive outcome, you’ll have a deal.
Are you a real estate investor and interested in learning more about passively investing in multifamily properties? Click here to download the Top 5 Critical Deal Components any Passive Investor Must Examine.
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About the Author
Ellie is the founder of Blue Lake Capital, a real estate company specializes is multifamily investing throughout the United States. At Blue Lake Capital, Ellie helps investors grow their wealth and achieve double-digit returns by investing alongside her in exclusive multifamily deals they usually don't have access to.
Ellie is the host of REady2Scale, a podcast that focuses on APS of real estate: Asset, Process, and Strategy. This podcast discusses how investors can scale their real estate portfolio and businesses.
She started her career as a commercial real estate lawyer, leading real estate transactions for one of Israel’s leading development companies. Later, as a property manager for Israel’s largest energy company, she oversaw properties worth over $100MM. Additionally, Ellie is an experienced entrepreneur who helped build and scale companies by improving their business operations.
Ellie holds a Masters in Law from Bar-Ilan University in Israel and an MBA from MIT Sloan School of Management.