Allocations of investor capital to real estate have been rising significantly over the last few years.
There is good reason for this trend. During times of uncertainty, such as the pandemic and subsequent economic fallout, tangible assets such as real estate tend to provide more stability than investments like stocks, which are typically more volatile. Also, with inflation currently reaching historic levels, investors are attracted to assets like real estate that appreciate and have the potential for increased cash flow through rental income.
Among the real estate sectors, multifamily has been one of the most stable for investors, garnering more than $315 billion in investment during 2021. Rising home prices create more renters by necessity, absorbing apartment supply and placing upward pressure on demand. As investors grow increasingly interested in multifamily real estate to diversify and stabilize their portfolios, financial advisors and registered investment advisors are being called on to evaluate opportunities in the sector for their clients. There are certain key points they must be aware of when completing this process.
Here is what financial advisors and registered investment advisors need to know when evaluating commercial real estate deals:
1. Assess a deal sponsor’s integrity and competence. More than anything, an advisor must be certain the sponsor they refer clients to has a well-established track record of acting with unwavering integrity in all its dealings. We’ve learned that being trustworthy is number one through nine of an investor’s top 10 concerns in deciding whether to invest with a sponsor.
Next, it’s essential that the sponsor has a long track record of successfully executing their business plans for the properties they acquire. This doesn’t mean one should never invest with a less experienced sponsor, only that the risk profile for your investor is higher with a sponsor who lacks a strong track record. Success in our business is not only about finding a great property in a strong market. It’s also about having the business acumen and economic wherewithal to “know when to say when” and walk away from a deal that has gotten too frothy or where due diligence has turned up some weakness that presents risk investors. Needing a deal too badly has resulted in many an ill-advised purchase.
Moreover, it is important to find a firm has decades of experience in asset and property management. This enables them to understand the nuances of every market and multifamily community they evaluate in order to position their portfolio for success and protect investors’ capital. It also means they understand capital markets and how to best maximize investor equity while also keeping that equity secure.
Advisors should also be sure the sponsor’s interests are aligned with that of the investors. The lion’s share of the sponsor’s compensation from a deal should be performance based, not fee based. Another way a sponsor can show that their interests are aligned with investors, is by investing their own capital in every transaction. This shows a willingness to put skin in the game and be shoulder to shoulder with investors.
2. Understand the sponsor’s investment thesis and strategic acumen. It’s important to have a clear comprehension of the sponsor’s investment thesis and their plan to execute it—a region’s overall market drivers as well as what makes a particular neighborhood especially compelling for investment.
Sponsors should seek out multifamily investments in markets with strong job, economic, and population growth, supportive regulatory environments and solid supply-demand fundamentals. Markets like Denver, Dallas, Austin and Salt Lake City offer residents a high quality of life, lower cost of living and plentiful job opportunities.