How do you approach finding, underwriting and acquiring deals when there’s so much competition that you cannot find a deal at a price that will meet your investment return goals?
This was the exact situation that my apartment syndication business faced in mid-2017. We had a lot of leads coming in that met our initial investment criteria, but the competition was such that the purchase price kept creeping higher and higher until the deal was projected to achieve returns that were below our passive investor‘s goals.
So, what did we do? Like any effective entrepreneur, we went into problem solving mode. More specifically, we reassessed our investment criteria.
The four questions we would ask for any deal we came across to determine if it met our investment criteria were:
- Was it built in the 1980s?
- Are there 150 or more units?
- Is it in or near a major city?
- Is there an opportunity to add value?
If we didn’t answer “yes” to all four of these questions, the deal would automatically be eliminated from contention. The benefits of setting initial investment criteria is that you don’t spend an inordinate amount of time underwriting deals that do not align with your business plan.
Up until mid-2017, we didn’t have much of an issue finding and purchasing properties that met this criterion. However, as of late, we have. In particular, we had a challenge finding apartment communities that were built around 1980, mostly due a high level of competition. So, we decided to adjust our investment criteria to include apartment communities that were built in the 1990s and the 2000s. And as a result, we purchased an apartment community built in the 2000s for the first time.
We like to look at properties built around 1980 because we are value-add investors. Generally, anything built earlier than 1980 would be to distressed to fit into our value-add business model. Conversely, anything built later than the 1980s wouldn’t have enough value-add opportunities or wouldn’t be sold at a price that would allow us to meet our investment goals. Or so we thought.
After reviewing all the potential deals in our pipeline, regardless of age, we realized that these newer deals – the ones built between 1995 and 2005 – were actually projecting returns similar to those that were built in the 1980s. Generally, since they are newer buildings, the opportunity to add value was lower, but that was offset by the reduction of certain expenses, like ongoing maintenance, management issues, vacancy rates, resident turnover and overall risk.
I think the reason why, in our current market, 1980s properties have comparable returns to 1990s and 2000s properties is because value-add apartment investors are conditioned to make the former property type a priority. Most value-add investors (including us at the time) wouldn’t even look at communities built in the late 1990s or early 2000s because they think the numbers won’t work as well because there will be less opportunity to add-value. However, we were able to apply our value-add investing knowledge to a property built in the 2000s and create a business plan that would enable us to achieve the desired returns of our passive investors. Whereas most investors pursuing deals in this age range aren’t looking at them through the value-add lens, we were able to identify areas that could be improved that the other, non-value-added investors had missed.
In other words, we leveraged our unique skillset (understanding how to recognize opportunities to add-value) to defeat the competition and be awarded the deal.
So, if you are having trouble finding deals that achieve your desired returns, reassess your acquisition criteria. Start looking at deals that fall outside your criteria and see if you can project similar returns. You may end up discovering what we did, which will lower your risk in the deal since it is newer and comes with lower risks and ongoing expenses. Or you might discover that deals in smaller markets, or smaller in size or another investment strategy all together is a better fit.
All that being said, our priority is still properties built in 1980. And we’ve only purchased one apartment community outside that range. So, we’re keeping our eyes out for our initial criteria but also now acknowledge that sometimes it makes sense to upgrade, especially when everyone else is looking at the same types of deals as us.
What about you? Comment below: What unique strategies have you implemented in your business to out compete your competition?
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.