How to Vet a Multifamily Real Estate Deal, 2020 Style

Updated: Mar 7



To say that the COVID-19 pandemic has changed the way we live is a major understatement. Just take a trip to the grocery store and you’ll see everyone wearing masks before entering the store, employees wiping down shopping carts, and customers using hand sanitizer as they travel throughout the store. It’s the “new normal,” and until a vaccine is developed, it will continue to disrupt our way of life.

The pandemic has also changed the way investors look at multifamily real estate deals. One group is convinced that it’s a time to step back and wait on investing until the pandemic settles down or is brought under control. Another group feels that there are currently great investment opportunities available and continue to move forward. I’m a big supporter of the second group, both as a sponsor and as a passive investor. Despite COVID-19, there is money to be made by investing in multifamily properties.

Whether you’re a sponsor or a passive investor, there are certain steps that should be taken prior to investing or purchasing a multifamily property. Due to the pandemic, these steps are now even more important to follow in order to protect your investment. Let’s look at the steps to take for peace-of-mind during these uncertain and unusual times.

Vet the Sponsor First

Finding the right sponsor is just as important as finding the right property to invest in. A deal is only as good as the sponsor who manages it. The best way to vet a potential sponsor is to ask several key questions that will provide you with a good insight into their approach and help you determine if he or she is a good fit for you.

First, ask the potential sponsor about their own unique investment philosophy. It’s the same with investors – some want high returns and aren’t interested in the risks involved in the deal, while others are more conservative in their overall approach and are willing to accept a lower return in exchange for having a lower risk. Make sure you have a good fit with the sponsor’s investment philosophy, or you’ll be disappointed with the results.

More importantly, ask the sponsor about their performance during COVID-19. Were they able to pay their distributions on time? Did they hit their projected returns? Ask about their prior investments as well. If they demonstrated performance in the past, chances are they are performing now, during COVID-19. It may seem like an uncomfortable question to ask a potential sponsor, but it’s a fair question.

Even if the sponsor isn’t performing well during the pandemic, see how they answer an uncomfortable question. If they’re upfront and honest about their results, that shows a sponsor you would want to work with. If they skirt the question and deflect, walk away – that’s probably not a sponsor you want to be involved with. Other questions to ask include their occupancy, rent collections, cash flow and whether they have reserves available to pay the mortgage if vacancy rates rise.

Research the Location

Once you have answers to questions about the sponsor’s performance during the pandemic, your next focus should be on the area they’re planning to invest in. I recommend using an interactive website located at www.citydata.com. If you have the exact location of the proposed property, you’ll be able to look at the area’s crime rate, median household income and other pertinent data that will provide you with an overview of the type of people who live there.