All Forum Posts by: Abbas Mohammed

It is often said that in Real Estate, choosing the right location is the most important choice you’ll make, and I couldn’t agree more. We all understand that, however, it’s usually left unclear as to what exactly a “good” location looks like, as opposed to a bad location.

When we speak of location, it’s important to understand that there are three types of locations that you have to pick well:

• State
• Region
• Neighborhood

After analyzing thousands of Real Estate deals across the US in many different markets, and seeing many, many points of data and trends where Real Estate investments made the most money, I’ve come to the conclusion that when it comes to choosing the right state, region, and neighborhood to invest in, one of the the most important, if not the most important, is to focus on Population Growth.

Why Population Growth Matters When Choosing Markets:

Real Estate is almost all about Supply & Demand, and interestingly enough, even with massive amounts of demand for Real Estate, supply has been incredibly suppressed due to governmental red tape, as well as limits caused by the material & labor shortage.

When people migrate from one state to another, it creates a big surge of demand in the state with incoming residents. It’s extremely difficult for those areas with migrating new residents to quickly build enough housing units to accommodate all the new incoming residents, and as a result, housing supply drops, and demand increases as the number of new tenants and homeowners quickly surge up.

Take a look at this chart below that shows different states’ migration rates in 2021.

Interestingly enough, those states with the highest inward migration rates also tend to have the highest rental increases, highest job growth rates, highest vacancy, etc.

Every other important metric tends to perform well when Population growth is high.

To clarify, just because a state has high population growth doesn't mean the region you're investing in has high population growth. What I mean by that is that you have to dig deeper than just choosing a state like "Texas" or "Arizona". You have to choose which submarkets to invest in, as well as which neighborhoods experiencing the most growth.

We pay for different data providers such as CoStar to get access to more detailed information and to go in more depth. I am a very big believer in Data and verifying things personally on the ground.

What’s the difference between selling or financing a multifamily property, and what’s the better option?

As with many things the answer is, it depends. It comes down to entirely what the business plan was initially when the deal sponsors were buying the property. Before we get into that, let me define the difference between a sale and a refinance.

1. Selling: Very simply, what happens in the event of selling the property if the investment performs well is that all investors get their invested capital back, and on top of that a portion of all the profits the property has made in appreciation over the years, depending on how the deal is structured.
2. Refinance: During a refinance, the sponsor aims to return as much of the invested capital back to investors and then keep the property for a longer period of time. Generally speaking during a refinance investors get the vast majority of their investment money back, yet the property is still held and investor shares remain the same, so you can proceed to reinvest your money in other projects while continuing to hold interest in the project you invested in.
3. Prepayment Penalty: Predetermined penalty set up front by the lender in case the investor group prepays the loan faster than expected. Many times this penalty can go up to many millions of dollars.

Now let’s get back to what is the better choice, to refinance or sell a property. Whenever you’re investing in multifamily property, the sponsor is generally locking in a loan anywhere between 3-10 years, sometimes longer. In most of these commercial loans, there is a very large prepayment penalty that is to be paid if the debt is paid off faster than expected. The financing agencies expect the loan to go up to the full term, so if a sponsor decides midway through the holding period to sell the property or refinance, they may incur a very heavy penalty that can go into the millions of dollars for the early payoff.

If the loan term is nearing its end, usually the prepayment penalty we discussed earlier is a lot lower, which gives the sponsor the flexibility to decide to either refinance or sell the property. Generally speaking, the sponsor would decide to refinance and hold on to the property if they’re achieving high cashflow that they don’t want to let go of. On the other hand, if the sponsor would like to achieve higher cash flow by renovating the property but has run out of rehab money, it may be best to sell it to someone else, get the profits out, and let the next person come in with a new batch of investor capital to upgrade the property and increase cash flow.

It mainly depends on the cashflow and the sponsors’ cash reserves to be able to improve the property further or not. Generally speaking new buyers usually come in with enough money for the purchase of the property plus a rehab amount to be able to improve the asset and increase its value, while someone who’s been holding on to the property for a few years may have already exhausted all their capital.

There you go, that's what it comes down to!

This is a common concern that some people think about when it comes to investing in real estate or practically any other asset. Is now the right time to do that? What if the market crashes?

While that’s a fair concern, one thing to realize is that there have been people sitting on the sidelines waiting for a crash to happen since 2011, which was the bottom of the real estate market. During the next decade, real estate prices and rental costs have skyrocketed, and those who have been investing throughout this period have enjoyed extensive growth in their wealth and finances, while those sitting on the sidelines have been getting priced out of the market more and more by the day.

That’s not to say that there won’t ever be a downturn or any problems, but the reality is, most risks can be mitigated up front by investing in the right properties and the right market. There are many investors that have made huge profits during the downturns and during the past decade. Any investing is dangerous at any time if you invest in the wrong assets, but what’s even more dangerous is letting your money sit in the bank earning significantly less than 1% in returns while inflation is skyrocketing, dropping the value of your wealth day by day while others are using inflation to get their money to grow and their loans to be of less value as time goes on.

We mitigate a lot of the risks and focus on relatively safe investments with modest returns and huge tax savings to ensure steady growth with numerous tax savings for all investors. The time to invest is NOW!