When you break it down, investing in real estate is not that difficult. Thinking of the whole process as one mountain to climb is what can make doing a deal seem like an insurmountable task. The truth is, doing real estate deals is like making a puzzle – you have to put the right pieces in the right place, and at the end, you have a beautiful picture. Or in this case, a successful deal.
So let’s talk about those pieces that make up any deal, no matter the strategy, the location, or the price. The following four topics are the pieces that combined, compose what you need to be successful in real estate.
People debate whether you need to find a deal first or find the money to close it. You need both, but having the capital gets you nowhere unless you put it to work in a good deal. Personally, I think finding the deal is the most important part of the equation. Without a good deal, the other pieces to the puzzle don’t fit. Finding deals is an in-depth topic itself, but I’ll break down how I approach it and then the top sources.
Marketing teaches us the premise of a funnel whereby firms bring in a high number of potential clients with lead sources and then sift through those potential customers by taking them through the funnel which is composed of qualifying factors, in order to spit those potential customers out at the end of the funnel as newly acquired customers. And thanks to Brandon Turner from BiggerPockets, I think of finding deals the same way. Finding deals is a big funnel.
When you are searching for deals you want to fill the top of your funnel, then screen through all those leads with your deal criteria, offer on the ones that meet your criteria, and finally close on the offers that are accepted. Each step in the funnel screens out deals. And it’s all a numbers game! All things equal, the more deals that flow in at the top of your funnel, the more will flow out at the bottom by way of closed deals.
So how do you fill the top of your funnel? Here are the top sources that I have found myself and from others that I look to for advice:
- Brokers – this is the main source of deal flow in multifamily. By building your relationship with your people skills and staying power, you can develop good sources of leads from brokers.
- Direct to Seller Marketing
- Cold Calling
- Direct mail
- Ringless Voicemail (RVM)
- Networking – tell everyone you know what you are looking for!
These are a handful of the best ways to find deals that I have come across, but this is not an all-inclusive list. Finding deals is oftentimes up to your ingenuity and a reflection of the work you put into your marketing channels and your relationships. The point is, if you want deals go find them. Don’t wait for them to come to you because you’ll be waiting for a long time.
After you find deals, underwriting is how you find out if they are good deals or not. Underwriting is a fancy way to say “run your numbers”. This is the financial analysis and projection piece of the puzzle that is increasingly more important today than it has been in the recent past. That is because as cap rates have compressed and prices have risen, deals have gotten slimmer with less room for error.
If you bought a multifamily property in a decent location in 2010-2015 you likely did not have to do much to see the market appreciate, rents rise, and with it your value. The market probably bailed out a lot of people who may have otherwise ended up in hot water due to bad underwriting. In today’s market, you do not have this luxury because the market is HOT. After all, interest rates are so low and capital is abundant in the marketplace, creating demand and pushing up prices.
You have to be able to know when you have a good deal and ideally make that determination from a conservative standpoint. I do believe there are still markets where you can be a little aggressive based on their demographics, trends, and based on what kind of business and jobs are heading to the market. However, you should not make your decisions solely based on past data. Real estate is no different from the stock market in that past returns are no indicator of future appreciation. Research your market, know the numbers, and project conservatively. If you do this and the numbers work well, that is when you offer on the property.
Raise Capital to Fund Deals
I should preface this section by saying you should always be raising. I don’t mean that you should always be collecting funds or taking deposits from investors, but you should consistently be networking with potential investors and having those conversations early so that when you have a deal you can be confident that you can bring the money to close it. What you don’t want is to convince a broker that you are a competent buyer to get a property under contract only to back out after wasting everyone’s time because you can’t bring the money to close.
I suggest using a Customer Relationship Management (CRM) tool. If you don’t want to pay for a service, you can easily start with an excel spreadsheet – the OG CRM tool. Use your CRM or your spreadsheet to list out everyone you can think of and then reach out to those people and have a conversation with them. If nothing else, you will catch up with old friends and strengthen some bonds. In the best-case scenario, some of those people may be on the same page as you or otherwise interested in investing in real estate. You then keep track of all those people and the amount they want to invest. By totaling the sum of your potential investors, you have effectively created your capital stack. Your capital stack is the amount of available capital that you have pooled from investors.
If you are just beginning to raise money, account for at least half of those investors to back out on you – at least until you have a proven track record. Even experienced capital raisers and investors usually experience a 30% drop-off with investors when a deal comes. So if you have $1M raised, count on only $500k to be available for an investment opportunity. The key is to raise more than you think you need so that you aren’t scrambling to fund a deal. Raise early and often, or partner with those who have capital, and you will be positioned to close your deals when they come.
Manage the Asset
Each piece is critical because you can’t do deals if you can’t find deals, sift through with good underwriting to pursue the best ones, and ultimately close deals by bringing enough capital to close. But if you can’t manage the deal effectively, your investment will sink like the Titanic and you’ll find yourself underwater.
Asset management is a skill that is developed through repetition and experience yet you can increase your success by doing your diligence upfront. The most important aspect is selecting a great property manager. The property manager carries out the day-to-day activities, screens and places tenants, and coordinates maintenance requests. This role can be filled by you or a third-party manager. The key to asset management is managing the manager and executing the business plan.
As an asset manager, you keep the property manager accountable, keep track of key performance indicators (KPIs), and manage the financials and accounts for the property. Knowing which indicators to track and keeping the property manager accountable to those KPIs is essential. You need to know your occupancy rates, how your marketing efforts are performing, your collection rate, turn time and cost, and maintenance costs to name a few. Asset management is where you take care of your investment and ensure its long-term success. You can get the best deal in the world and still fail by not managing effectively. And good asset management can turn a decent investment into a solid investment that produces great returns.
Putting It All Together
The good news is that you don’t have to be good at every area on this list. Multifamily investing is a team sport and leveraging the strength of a good team is the best way to fast-track your success. You can develop and focus on your strengths and partner or hire out the other areas. I know several operators who focus on finding and managing deals while others just focus on raising capital and, in both cases, each has found success by partnering with other firms who specialize where they are weak. And you can do the same thing! If you have access to a large amount of capital you can partner with a firm that has a solid track record of finding and managing deals. It’s likely the majority of their time is spent doing what they are good at and value those who can bring capital to their deals.
You can of course vertically integrate with time and control every aspect. However, it’s important to realize that you don’t have to be great in every aspect to get started or find success. You can focus on what you are good at and combine forces with others who have strengths in areas you are weak in. As long as you know what the pieces to each deal are, you can treat the deal like a puzzle and put all those pieces together how you see fit.
Blake Dailey is a multifamily real estate investor with 85 units and is host of the Multifamily Journey Podcast. He has reached financial independence (Passive Income > Expenses) through investing in real estate and aims to help others do the same. He helps passive investors impact their lifestyle and wealth by investing in multifamily real estate. He helps investors achieve the ultimate asset – Time – by making their money work so they don’t have to.