Risk is inherent in any investment decision. However, risk can be managed, especially when there are proven models and systems. Just like playing a sport or learning a game, best practices exist and those who follow the proven path are more likely to find success in achieving the goal.
When it comes to multifamily investing and passively investing in apartments, it is no different. Below are three simple red flags that should catch any apartment investor’s attention as a risk to the investment decision.
Markets with Low Job Diversity
Right off the bat, the market selection is one of the most critical (if not the most) determinant of success in resale estate investing. As the popular phrase goes…”location, location, location,” to select the right market is half of the path to success. Many investors focus on very important key metrics such as population growth and job growth. One that can be missed but should never be overlooked is job diversity.
You see, even when if there are lots of jobs, a key driver of population growth, if they are segmented into one industry or one major employer, there is great potential impact from an event that affects that industry or employer. For example, if the jobs in an area are mostly concentrated into the aerospace industry, one should consider the risk of budget cuts and how that can affect jobs in the area. Job diversity protects against risk of losing substantial jobs in the area, population decline, lower demand for your housing and high vacancy.
Properties with High Economic Vacancy
Vacancy is a killer of income in any real estate investment. Physical vacancy, the more popular metric, measures the percentage of units that are not occupied. Economic vacancy goes a step further and takes into account residents that are in units but are not paying full or partial rent. Economic vacancy includes bad debt, concessions, loss to lease and more. Further, high economic vacancy is an indicator of some sort of issue with the market, property or management.
When underwriting and doing due diligence on a multifamily asset, it is important to know and understand not just the physical vacancy but also the overall economic vacancy. Bad debt and uncollectible rent is not as easily seen and no one wants to invest in an income-producing asset only to find out that they cannot collect the income.
Sponsors with Little Past Experience
More important than any of these, if you are a passive investor, it is always important to work with the right sponsor and partner. Vetting the market and property is certainly important, but if you are not working with a competent sponsor with whom there is alignment of interests, trust and experience, your hard-earned investment capital is at risk.
A great and experienced apartment syndicator has a track record, many stories and lessons learned to leverage in order to gain trust and make great investments moving forward. Develop a relationship, ask questions, and ensure there is comfort and trust with anyone with whom you choose to invest.
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Rodney Robinson II