All Forum Posts by: Jorge Abreu

Can I invest in syndication with my retirement funds?

Yes! In fact, this is one way that many passive investors get started with real estate syndications. To invest in a real estate syndication using retirement funds, you need to first roll over your existing retirement funds (401k's, IRAs, etc.) into a self-directed IRA account. We like Provident Trust Group for their low fees and great customer service, but there are many self-directed IRA companies out there. Once your money is in the self-directed IRA account, you can choose what you want to invest it in, and the self-directed IRA custodian will invest it on your behalf. For a real estate syndication, you will need to provide your self-directed IRA custodian with copies of the legal documents for the syndication (private placement memorandum, operating agreement, and subscription agreement). Then, they will send in the funds on your behalf. Any returns you make on the investment must go directly back into the self-directed IRA account, never into your personal accounts.

Where can I find real estate syndication opportunities?

Many real estate syndication opportunities cannot be publicly advertised. The ones that you do see publicly advertised are foraccredited investors only. You can do a Google search, but how do you know that the opportunities that pop up are legitimate ones, put together by experienced teams with strong track records, who will safeguard your money over a period of several years? It’s extremely hard to find great real estate syndication opportunities just by doing a Google search.

The best way to find real estate syndication opportunities is to get out there and talk to people in the real estate investing space, and particular those in the real estate syndication space. This community is quite small, and once you get connected, you’ll easily be able to find sponsors and real estate syndication opportunities that fit with your investing goals.

We know how hard it can be to find great real estate syndication opportunities. So, that’s exactly what we do. We have dedicated the majority of our time and resources to connecting investors with great real estate syndications. We work hard to find the best real estate markets to invest in and partner with experienced sponsor teams in those markets. We’ve been in this space for a while, so we know most of the larger players and work hard to vet all of the sponsor partners we work with, to make sure they have a strong track record and know what they’re doing.

Once we find a deal with a great sponsor, we partner with the sponsor and open up that real estate syndication opportunity to our investors. Our investors will never pay any direct fee to work with us. We are merely the conduits between our investors and the sponsors. The main benefit we provide our investors is in the investing experience. We provide a lot of resources to our investors and make sure to make ourselves available at all times to answer any questions along the way (sponsors can often be busy with the acquisition of the property and might not have time to answer investor questions). We also invest in these deals right alongside.

our investors. We will not open up a deal to our investors that we wouldn’t consider investing in ourselves. If you’re interested in investing passively in real estate syndications, a great first step is to join our Investor Club. After we get to know you, we’ll help you find real estate syndication opportunities that meet your specific investing goals.

NEXT: Investor's Most Commonly Asked Questions (Part 2)

After you invest in a real estate syndication, you will get regular updates on the progress of the project after the deal closes. At any time, you can ask for more information or clarification, but when a unit floods due to plumbing issues, you will not be the one the tenants call!

Here are the things you should expect from the time a real estate syndication deal closes through the time that the asset is sold:

Upon Closing

As soon as the real estate syndication deal closes, you can expect a note letting you know that the deal actually closed. Included within the notice will also be an Investor Guide, which will give you a high-level overview of what to expect moving forward and answer some frequently asked questions, including questions about the timing and logistics of your cash flow distributions, how to set up your auto draft deposits, tax-related questions, and more.

Monthly

Every month after that, you can expect to receive an update on the progress of the real estate syndication project via email. Depending on the deal, you will also receive either monthly or quarterly cash flow distributions. The update emails include things like the current occupancy, how many units have been renovated that month, whether the renovations are on track with the business plan, and occasionally some photos of the latest progress. This will help you to keep a quick pulse on the project. The progress updates are mostly anecdotal and include a quick high level overview of the different initiatives going on at the property.

Quarterly

Every quarter you can expect to receive a detailed financial report, including the rent roll and the profit and loss statement from the trailing twelve months. Beyond the anecdotal updates you’d get each month, these quarterly reports are much more detailed and give you a line-by-line breakdown of exactly how the asset is doing financially. These quarterly financial reports are not exactly the most fun to read, especially if you’re not a spreadsheet lover, but I highly recommend you at least crack them open to take a look. Even a quick scroll through the pages will give you a decent idea of the overall performance of the asset and the metrics used to assess the ongoing progress.

Annually

Every year, during tax season, you can expect to receive a Schedule K-1, which is a tax document issued for an investment in a partnership, like a real estate syndication. The purpose of the K-1 is to report your share of the income, deductions, and credits. A separate K-1 will be issued for each real estate syndication you’ve invested in. They are typically issued around the same time as 1099s and serve a similar purpose for tax reporting.

Next: Investor's Most Commonly Asked Questions

Let’s look at the great tax advantages of investing in multifamily real estate. These benefits fall into five main categories – Depreciation, Cost-Segregation, Passive Income Tax Treatment, 1031 Like-Kind Exchanges, and Death.

NOTE: I am not a CPA, tax attorney or tax expert in any way, so this article may contain erroneous information. Do not rely on it as accounting, taxation, or legal advice. The article is based on an interview Chris O'Neal of Moody & O'Neal CPAs LLC of Mt. Pleasant, South Carolina, whose contact information is provided with his permission. Please consult a licensed professional before making any investment decisions, particularly in the complex area of taxes.

Depreciation

Of all the great tax benefits for multifamily real estate investors, the first and perhaps best is depreciation. Multifamily properties often rise in market value over time. And, with proper maintenance, their useful lives are practically unlimited. However, without proper maintenance and capital spending, buildings will eventually become uninhabitable.

Money spent on capital items comes from after-tax dollars, which owners might be reluctant to spend. So to encourage multifamily real estate owners to undertake necessary capital spending, the government permits them to take a depreciation deduction against current income equal to 1/27.5 (or 3.6%) of the building’s value at purchase each year.

In other words, even though buildings practically have a limitless useful life, the government allows you to treat a multifamily property as if the property will become obsolete in only 27.5 years. And, what’s more, regardless of the actual age of the property, the depreciation clock resets every time the property is sold to a new owner.

For Example: If you purchase a property for $5,000,000 and the land is deemed to be worth $250,000, each year a multifamily property owner is permitted to deduct 1/27.5th of $4,750,000, or $172,727, from current income each and every year. In most cases, particularly early in the investment's life, this deduction eliminates most or all of the current income. The investor might even put cash into her pocket and show a loss on their tax return. The depreciation in your passive investment LLC will flow through to investor's prorata according to their ownership percentage.

Cost-Segregation

The ability to undertake a cost-segregation study is another great benefit of multifamily real estate investment.

While the government considers the useful life of a multifamily apartment building to be 27.5 years, it considers the useful lives of certain items on the property, like cabinetry, appliances, and fixtures, to be much shorter – as little as 7 years or less

A professional cost-segregation study will separate these items out from value of the building, meaning you may realize even greater tax savings from the depreciation deduction.

In the earlier example, if you conduct a cost-segregation study, you may find that $1,000,000 of the value of your $4,750,000 building comes from cabinetry, appliances, fixtures, etc.

In that case, your depreciation deduction would be even greater for the first 7 years – $136,363 from the building depreciation ($3,750,000/27.5) and $142,857 ($1,000,000/7) from personal property depreciation, for a total of $279,220 in depreciation expense annually.

You’d almost certainly have tax “losses” during those first five years that you could offset against other investment income.

Cost-segregation sounds great, doesn’t it? However, consider its use carefully, because aggressively taking depreciation deductions early could possibly result in a tax bill greater than the cash proceeds you generate when you sell. (See 1031-exchange section below.)

Passive Income Tax Treatment

Another great advantage of multifamily real estate for investors is passive income tax treatment. As long as you are not a “real estate professional” (defined as someone who spends more than 500 hours a year working on real estate), your income from an investment in a multifamily real estate is taxed at passive income rates, which are not subject to employment taxes and therefore are lower than current income tax rates. Thus, even if there is taxable income left over after the depreciation deduction, it will be taxed at the lower passive income tax rate. In addition, appreciation is taxed at capital gains tax rates, which are lower than current income tax rates.

So, as long as you are not a “real estate professional,” any income and gains you receive from participating in a multifamily real estate investment will receive favorable tax treatment. Again, this is true even if you participate passively in a deal.

Section 1031 Like-Kind Exchanges

The depreciation deduction discussed above is subject to “recapture” on sale. That means your gain on sale is increased by the amount of depreciation deductions you took earlier. However, the government lets you defer taxes on the recaptured depreciation through what’s commonly known as a “1031 like-kind exchange,” after Section 1031 of the US Tax Code. On sale, your gain is calculated by subtracting your “basis” in the property from the sale price. The “basis” is the purchase price minus the accumulated depreciation over the life of the investment.

So, let’s assume that after five years you sell the property for $6,000,000. Over that time, you take $172,272 annually in depreciation deductions, totaling $861,360. Your basis in the property would drop from $5,000,000 to $4,138,640. Subtracting that from the $6,000,000 sale price would give you a taxable gain of $1,861,360. (If you did cost segregation, your taxable gain would be $2,396,100.) The government allows you to defer paying these taxes by using the proceeds for the purchase of a more expensive, higher-basis property within a set period of time. (A complicated process that requires a professional 1031 intermediary.)

Though your basis in the next property is reduced by the amount of the taxable gain that was deferred, you are permitted to repeat this process as many times as you wish until you die. And, when you die, something very interesting happens . . .

Death . . . your taxable gains go “poof” and evaporate into thin air!

Yes, death is a tax benefit for multifamily real estate owners and investors!

Almost unbelievably, when you die, the government assigns a new tax basis to the properties when they are transferred to your heirs – the fair market value at the time of your death – meaning that all those accumulated gains disappear.

Thus, let’s assume that, instead of selling the property for $6,000,000, you die when its fair market value is that amount. Your heirs do not inherit a $6,000,000 property with a $4,138,640 tax basis and a built-in taxable capital gain of $1,861,360 (more if you did cost segregation).

Instead, the tax basis is reset to the $6,000,000 fair market value, and all the previous capital gains vanish for your heirs! Looked at this way, death is a benefit for real estate investors, and real estate is an excellent estate-planning tool!

An Important Caveat For Syndication Deals

Investors in syndicated multifamily real estate investments should beware of one thing. Their individual proceeds from a sale of the property are not eligible for a 1031 exchange. To avoid taxes on their capital gain, investors in a syndicated deal must keep their funds in the LLC. The LLC is the actual owner of the real estate, and is the only party eligible to attempt a 1031 exchange. Keeping

funds in the LLC may not be an option under the circumstances. Investors contemplating investment in a multifamily real estate syndication deal should keep in mind that, while they will receive tax-advantaged income during the life of the investment, it may not be possible to defer taxes on capital gains after the property is sold via a 1031 Exchange.

However, you can use a Deferred Sales Trust to help them gain tax deferral, liquidity, diversification and freedom to buy qualified real estate at any time tax deferred with your funds so you can create and preserve more wealth. What is the Deferred Sales Tax Trust you ask?

A Deferred Sales Trust (DST)

The DST offers an attractive and flexible tax deferral alterative to a 1031 Exchange. The DST is a type of IRC Section 453 installment sale, also known as a "seller carry-back". Using this strategy, the seller can achieve significant tax deferral benefits by not receiving actual or "constructive receipt" of the proceeds at the time of the sale, instead receiving payments made to them over time. This is a complicated strategy that requires a qualified trustee to handle. In a nutshell, you as the owner would transfer the ownership of the asset to a dedicated trust. The trust then would sell the asset to the buyer. As a result, there is no capital gains tax immediately owing from the initial transfer to the trust because of Section 453, and no capital gains tax liability from the sale from the trust to the buyer because there is no capital gain. You then become a note holder (creditor) and the trust makes the agreed upon payments to the note holder, pursuant to a payment agreement called an "installment sales contract." The only capital gain that will be recognized and paid to the IRS and the State is only that portion of the overall capital gains due from the taxpayer's sale to the trust, based upon the proportion of principal repayment established in the terms of the installment agreement. Upon the demise of the seller, the note payments and the capital gains tax deferral from the DST will continue to the next generation.

Death Tax Benefit

The Death Tax Benefit is available to real estate syndication investors, and your heirs’ tax basis in your shares will be their fair market value at the time of your death. While these great tax advantages are available to other forms of real estate besides multifamily real estate, they are not available for most other investment assets. This is one reason why multifamily real estate is such an attractive investment vehicle.

Next: What to Expect After You Invest In a Deal

If you plan to be a passive investor in a multifamily syndication, you need to understand what a Private Placement Memorandum (most commonly referred to a the PPM for short) is, why it is needed and what should be contained in it. The PPM is technical, lengthy (often more than 100 pages) and carries legal jargon and disclaimers that would pretty much scare anyone out of investing. As I like to say, it explains all the “side-effects” including all the ways you can die if you proceed.

All joking aside, the PPM is a document there to protect you as the investor and a necessary part of the due-diligence process for every investor.

The goal of this module is to help take away the mystery, overwhelm and to help you navigate the private placement memorandum efficiently as possible so that you can make a well-informed decision about a potential private investment.

PPMs will vary by the type of issuer, the size of the offering, and the number and type of investors being solicited, but each private placement memorandum should at least contain the five sections outlined below.

1. Executive Summary

This Executive Summary section presents a condensed description of the investment. It usually includes the investment thesis, pricing, minimum subscription amount, investor qualifications, disclosure of management fees, and a brief discussion of the issuer’s governing documents. Note: Be wary of disclaimers that allow management to have too much latitude or discretion and pay close attention to the conflicts of interest. This section should mirror what has been stated in the marketing materials and represented by company representatives.

2. Investment Strategy

The Investment Strategy section presents a thorough explanation of the issuer’s investment strategy, process, and criteria, as well as its deal flow sourcing and exit strategy. Included in this section is a description of the issuer’s key competitive advantages and resources in its specified markets. It will also discuss the industry, state and geographical focus of the investment. Note: Investors should review this section to learn how the issuer intends to achieve its targeted results and assess whether the investment strategy supports the issuer’s objective. Investment strategies that are well reasoned and clearly written will provide investors with information they’ll need to make a fully informed investment decision. An offering with an investment strategy that is vague, unclear or that does not make sense is probably an offering that should be avoided.

3. Management and Experience

The Management and Experience section contains biographical and background information about the principals and key employees. It provides a detailed overview of the issuer’s history and how it has succeeded. This section often provides the issuer’s investment manager’s track record.

Note: The success of an investment will be dependent upon the management team, so it is imperative that team has the background and experience to implement the investment strategy. Prior experience successfully managing similar investments supports the proposition that the management team is capable of implementing the investment strategy with positive results.

4. Summary of Principal Terms

Perhaps the most important section of the private placement memorandum, is The Summary of Principal Terms which outlines the organization of the company, what fees investors will pay, what expenses the company will bear, how profits will be split, and a thorough summary of the business plan. A careful analysis of the Summary of Terms should provide most of the information necessary to fully comprehend the investment offer

5. Risk Factors

Risk Factors seem to be the section that will truly make everyone’s eyes glaze over. Few investors need to be advised that, “in the event of war, no assurance can be given that the investment will meet its stated goals.” Nevertheless, this section is perhaps the most important component of the PPM because it outlines the factors that make the offering risky or speculative. While there are certain risks that are present in nearly all investments (civil unrest, bankruptcy, natural disasters, etc.), investors should pay particular attention to those risks that are unique to the investment opportunity given the nature of the issuer, its investment plans and the trends within the issuer’s industry.

In addition to risks inherent in the investment, there are risks associated with the offering entity and the management team. Perhaps the most significant of these are conflicts of interest.

Take note of the following:

Fees and expenses – Shifting expenses from management to the investor, charging management salaries and overhead to the fund, allocating transaction fees to the fund and not co-investors, etc.

Transactions with affiliates – Affiliate of management acts as creditor or lender to the fund, or the fund acquires an investment from a management affiliate Competing funds – Management launches a new fund with the same strategy as an earlier fund, creating conflicts between allocation of investments between the funds The above-listed sections are those commonly found in most PPMs, but it is not the exclusive list. As you are reading the private placement memorandum, if you find any information that seems odd, inconsistent, or otherwise incomprehensible, you should contact the issuer and the issuer’s management team should be available to respond promptly

Next: Tax Advantages of Multifamily Real Estate

Step 1: The sponsor announces that the deal is open for funding, usually via email.

Step 2: You review the investment summary deck and decide to invest.

Step 3: You submit your soft reserve, telling the sponsor how much you’d like to invest. Real estate syndications are almost always filled on a first-come, first-served basis. Thus, sponsors use a soft reserve to help them determine who’s interested in investing. By submitting a soft reserve, you are telling the sponsor you’re interested in the deal and want to invest X amount. The soft reserve does not guarantee you a spot in the deal, nor does it lock you in. You can always back out or change your mind later.

Step 4: The sponsor will hold an investor webinar or in person meeting, where you can get more information and ask any questions you might have.

Step 5: The sponsor confirms your spot in the deal and sends you the PPM (private placement memorandum).

Step 6: After signing the PPM, you wire in your funds or send in a check.

Step 7: The sponsor confirms that your funds have been received.

Step 8: The sponsor notifies you once the deal closes and lets you know what to expect next.

Step 9: After you’ve sent in your funds for a real estate syndication deal, your active participation is done. Now you can sit back and wait for the cash flow to start rolling in. Depending on the particular deal, you may receive either monthly or quarterly cash flow distributions, and they may start immediately, or not for a few months.

Step 10: You should start receiving monthly updates as soon as the deal closes. These monthly updates will include information on the latest occupancy and progress on the renovations. Every quarter, you will receive a detailed financial report on the property, and every spring during tax season, you will receive a Schedule K-1 for your taxes, which will report your share of the income and losses for the property

👉Next: Navigating the Private Placement Memorandum (PPM)

No two-investment summaries are the same. Some will be a beautiful display of professional pictures, charts and graphs that expand 10-20 pages or more of information, while others will be a one-page summary of the offering with more information available upon request. Whatever you do, don’t allow the beauty of an investment summary camouflage what’s hidden within and be the determining factor of whether it is an opportunity worth diving into or not.

It is important to know what your investment goals are. You should have a predetermined set of guidelines and non-negotiable screening items laid out prior to reviewing any investment summary. This will keep you from being sucked into a deal that doesn’t meet your investment criteria. Even though every investment summary is different, there are some basic elements that are pretty common across all multifamily real estate syndication investment summaries:

• Project name (often the name of the apartment complex)

• Photos of the property and area

• Overview of the submarket

•Overview of the deal

• Details of the business plan

• Projected returns and exit strategies

• Detailed numbers and analyses

• Team bios

Let’s take a look at a sample one-page investment summary so you can see what I look for at first glance. 

Here are the things that I notice at first glance:

Off market

When an asset is acquired off-market, it means that the seller chose not to list the asset publicly. Maybe the seller didn’t want the tenants to know that the building was being sold (this is quite common). Maybe the seller needed to sell within a set timeline. Or maybe the seller already had a buyer in mind.

Regardless, off-market is almost always a good thing. This means the deal sponsor team did not have to compete with other potential buyers on price. There’s a good chance that the purchase price is low, or at least very reasonable.

Value Add

A value-add investment is an asset that presents an opportunity to add value in some way. Maybe the rents are significantly below market rates because the previous owner hasn’t raised rents in 10 years. Maybe the kitchens are still from the ‘90s and could use some updating. Maybe there’s an opportunity to add some brand new additional units. Value-add means more control is in the hands of the deal sponsor team. Rather than relying solely on market appreciation, there are things they can do to create additional equity, even if the market stagnates.

Because there’s a chance to add value and improve the living conditions, as well as the returns for the investors, this is a true value-add. The team will go in, complete the renovations, and then rent out the updated units for $1,200 per month.

When you add up the $200 per month increases across all 250 units. That creates a ton of additional equity in the building, not to mention a ton of value for the residents who live there. Once residents see the updated spaces, they’re often happy to pay the higher rents and start to take more pride in their community.

Track Record of the Sponsor

They say here that they have done this before and are currently in the trenches with another asset nearby. I also see, that they’ve started implementing their business plan at Beta Apartments and that they’re surpassing their original projections. This tells me that their business plan is working and that they would likely be able to continue to strengthen their track record through Omega Apartments.

The fact that this is an off-market deal tells me that they’ve likely built up a strong reputation in the area, amongst brokers, property managers, and other apartment owners. Otherwise, they wouldn’t have been awarded this off-market deal.

Strong Submarket

I notice that this deal is in the “#1 fastest growing” submarket. I would then go to Google and research the market as well as the neighborhood the property is. Much of this will be in the full investment summary, but I always like to do a little research on my own as well.

Proven Model

According to the summary, ten units have already been updated and are achieving rent premiums of $150. This tells me that the rent increase following the value add is not only possible, but probable. Very good news!

Equity Multiple

In this case, the projected equity multiple is 2.1x. This means that during the life of this project, my money will be more than doubled. Therefore, for a $100,000 investment, I will receive $210,000 over the life of the investment. I typically look for an equity multiple of 2X. This one passes the test!

Unit Count

Because this deal has 205 units, means that the team would be able to take advantage of economies of scale (i.e., increasing efficiencies by leveraging shared resources across the many units). I will typically look at anything above 50 units. Ideally, to maximize economies of scale, I like to see over 100 units. It’s important to me that third-party professional property management manages the properties I invest in. You need a unit mix of close to 100 units to maximize the expense of on-site property management.

Next Steps

If I like what I see, I’ll request a copy of the full offering summary. In the mean time, I’ll do my research on the market, sponsors, etc. to insure that no red flags appear.

Once you are comfortable with an opportunity, it is important to jump fast! If it is a good deal, they go fast and are awarded on a first come, first serve basis. Be ready to make a soft commitment to reserve your spot. There is no shame in back out of a deal prior to signing the Offering Memorandum and wiring your funds should a red flag come up during that time. No question is a stupid question, so get all the answers you need to make an educated decision and then get in the deal!

👉Next: The Step-by-Step Process of a Syndicated Investment

When evaluating multifamily properties, a grading system is used to classify different assets. Just like a report card, multifamily assets get a letter grade, ranging from an A to a D.

Class A Multifamily Assets 💵

Let’s start at the top, with Class A. Class A is the top tier. These are the luxury apartments. They are located in the most highly desirable neighborhoods, with the best school districts. The interiors will have hardwood floors, granite countertops, and stainless steel appliances. Bathrooms will likely include beautiful tile work, and maybe even a rain shower.

Class A apartment communities often include top quality amenities as well. Full service gym, resort style pools, clubhouse, rooftop patios, dog parks, picnic areas, and covered or garage parking. For all this luxury, you will be paying much higher rents.

Class B Multifamily Assets

These assets tend to be in nice neighborhoods as well, often around the corner from a Starbucks or Target. Often, you’ll find hardwood look-alike flooring (high quality vinyl or laminate), black or stainless appliances, solid surface countertops, and nice cabinetry. Class B assets tend to be a bit older, built within the last twenty to thirty years, the buildings tend to have little to no deferred maintenance. Amenities can vary. Often times they are similar in scope to Class A Amenities. As you can imagine, rents for Class B apartments are lower than Class A apartments, so these assets tend to appeal to more of a working class tenant profile, which can be a huge benefit to investing in Class B assets.

Class C Multifamily Assets

They often tend to be in more developing neighborhoods. They don’t particularly stand out when you drive by them. They’re not falling apart, but they’re not sparkling either. There is typically some or a lot of deferred maintenance (e.g., older roofs, peeling paint, etc.). Inside these units, you’ll often find more dated kitchens and bathrooms, as well as laminate flooring or carpets and they are usually sporting “vintage” appliances.

Class D Multifamily Assets

At the bottom are Class D assets. These are the types of places you would normally avoid. There’s typically a lot of deferred maintenance and neglect, which is apparent even from a distance. They are in sketchier areas of town, where you probably wouldn’t want to be caught alone after dark. The interiors of these units, as you can imagine, are consistent with the exteriors. Dated, worn, and poorly constructed.

To summarize, Class A apartments are the highest quality apartments you can find. They’re in the best neighborhoods, with the best finishes, but also cost the most. On the opposite end of the spectrum, Class D apartments are those you wouldn’t want to touch with a ten-foot pole. The buildings are often falling apart and are located in rougher areas of town. In the middle are Class B and C assets.

If we invest in Class B and C multifamily assets is because they provide the most potential value for investors, as well as the greatest potential impact for communities. Perhaps the biggest reason we invest in Class B and C multifamily assets is because of the opportunity to add value. We look for properties that don’t have huge maintenance issues, like the need for roof replacements and foundation fixes.

Perhaps the favorite aspect of investing in the commercial real estate space is the value-add strategy, as it gives us more control over the value of the property. Rather than relying solely on the market to appreciate, we can be proactive in improving the property, raising rents to market values, and thereby increasing the equity in the property.🙌

👉What are your thoughts on that?

Next: Navigating The Investment Offering Summary

 This one is hard to quantify like you mentioned there are lots variables that come into play. Population size, what type of crime, crime rate in that specific city, etc...

This is definitely one that changes from city to city.

Step 1 Population Growth

Use city-data.com to research the city’s population

Goal: Since the year 2000, has the city’s population gone up at least 20% (Ex: Phoenix, Orlando, Las Vegas, Columbus Ohio)

Step 2 Income Growth

Use city-data.com or bestplaces.net to research the city’s income growth

Goal: 30% income growth since the year 2000. This implies that the city is keeping up with inflation. If it’s not keeping up with inflation than you end up with high levels of delinquency, especially in Class C properties.

Step 3 Median House Value

Use city-data.com to research the city’s median house or condo value

Goal: 40% increase in median house or condo value since the year 2000.

Step 4: Amount of Crime

Goal: Under 500 crimes in the previous year. You want to see that the number of crimes has come down over time.

If you apply these four principals, you will stay away from cities that will not flourish during an economic down turn. Next, you want to look into the neighborhood within that city.

Step 5: Neighborhood Household Income

Goal: Income needs to be between $40K-$70K

This is ideal in order to generate the cap rate necessary for a successful syndication and stay above the increase in delinquency marker. Under $40K household income is tied to increase in delinquency. Above $70K, the neighborhood demands a lower cap rate, therefore best for a REIT acquisition vs. a syndication.

Step 6: Neighborhood Poverty Level & Neighborhood Unemployment Rate

Goal: Poverty Level below 20%

Never invest in a neighborhood where the poverty level is above 20%. Above the 20% mark, your unit churn expense will kill any and all profit.

Google unemployment rate for the city

Goal: Make sure that the neighborhood unemployment rate is not more than 2% higher than the city’s unemployment rate. If it is higher, than the moment a recession hits, the unemployment for that neighborhood is going to skyrocket.

Step 7: Neighborhood Demographic Diversity

Goal: You want there to be at least two demographic races of people that make up the neighborhood.

Note: You don’t buy for good times, you by for bad times and always stress test every deal!

👉Next: Exploring the Four Multifamily Asset Classes

✨Successful real estate investing relies on several factors, but “location, location, location” is top of the list. But “location” is a broad term, and evaluating the right place to invest your dollars means identifying the right markets both geographically and economically.

Some cities simply provide better opportunities than others based on factors like the relative cost of housing to average incomes, availability of good jobs, and demographic trends. At the local level, factors like the quality of schools, neighborhood safety, access to amenities like parks, shopping and entertainment and a host of other variables come into play.

Here are some guidelines to help you ask the right questions as you determine where to invest.

Start with your Goals

Are you investing for the long term or trying to achieve a shorter-term boost in value? Various markets throughout the country will produce more consistent cash flow per dollar invested, but the properties may not appreciate much. Other regions will exhibit strong trends for appreciation in value, but may not cash flow well due to the high costs of properties relative to rental rates.

This is why it is very important to know your investment goals and understand what is going to take to get there.

Investing Locally vs. Remote Markets

Many investors want to be able to see their investments or rely on their own expertise and local network to manage properties. If you live in a high cost city like San Francisco or Washington, DC, the real estate market can produce some positive opportunities, but only if you have significant capital to work with. In many cases, it may be better to evaluate other markets that fit your goals more cleanly.

When looking at a metro region, there are a wealth of statistics available to help you determine the overall viability of that market. Here are several categories of data to look into:

Economic factors

• How many people live there?

• Is the population expanding or contracting?

• Is the economy diverse? A one company or one industry market can take a big hit if that one employer base goes through difficult times. A city with multiple economic drivers will be more stable and more likely to grow.

• Are wages rising, falling or stagnant?

• What is the unemployment rate?

Real Estate Factors

Once you find a market or couple of markets that look positive at the economic level, it makes sense to start looking at the general housing market in that area. Some of the questions to ask here include:

•What is the ratio of owner occupied to rental properties? Areas with a higher percentage of renters will obviously create a bigger pool for you to choose from and more demand for quality rental units. • Rent-to-Value Ratios. A general rule is that monthly rents should be at least 1% of the property value. If you buy a property for $250K and can only rent it for $1,800/month, the likelihood that you will see positive cash flow if slim and you will be banking on appreciation.

• Vacancy Rates and Time on Market. A property purchased at a bargain rate does you no good if you cannot find a renter. Evaluating trends in the number of vacant properties and average time to fill a vacant rental can be critical.

• Housing Sales Statistics. Even if you are looking at a long term buy and hold, the ability to sell a property and receive a reasonable price is critical to your exit strategy. This can also be a solid indicator of the overall health of the real estate market. Look at trends in month’ supply of inventory, time on market, and asking vs sales prices.

Regulatory Factors

Some markets are friendlier to real estate investors than others. If you take two individual properties with similar dynamics such as cost, condition and rental potential, you can see very different results based on things like taxes and whether landlord/tenancy laws are more or less favorable.

It really pays to understand the following factors:

• Property insurance rates

• Municipal landlord taxes (an IRA or 401k may not be exempt from certain local taxes)

• Local landlord/tenant laws – how easy is it to evict a tenant, for example.

Local Market Factors

In addition, you will want to look at things like neighborhood safety, quality of schools, access to transportation, proximity to shopping and recreation, and other factors that drive desirability.

Investing in real estate is not really that different than any other type of investment. You want to identify opportunities that present the maximum potential with the least risk possible.

👉Next: The Seven-Step Market Analysis System