This post is a departure in that these "deal questions" I am asking you to consider have little to do with the nuts and bolts of buying a multifamily asset; they are specific to your long-term strategic thinking about your purchase. We all know that anyone can buy a deal; it's what you do with it that makes or breaks the transaction.
Best practices in acquisitions requires a plan of action pre-closing (of course). Answer the following five questions prior to closing on your next acquisition and you will be miles ahead in creating a vision for the asset and how it fits within your holdings.
Is the acquisition strategic; are you taking strategic considerations into account? There is nothing wrong with "one-off" buys unless each and every deal acquired is in this category. When that occurs the resulting portfolio has less value than one that is collected with purpose, with vision, with a strategic objective.
Are you bidding on the deal based solely on price? Any deal acquired based on price alone is assumed to have some rough edges to say the least. The worst of all worlds is to buy a deal on price alone only to find out the underlying value is far less based on identification of material facts post closing. Deals based on price often require fast closing to capture the potential asset. Just make sure not to go so fast as to short-change your due diligence.
Are your income and expense projections real? Have you built your very own rent roll? Are T12 numbers in alignment with in-place leases? Do you have two years expenses? Did you vet the expense side and determine that all or almost all vendors are third-party service providers?
Are you looking at long-range demographics - I mean really looking at them? As you already know, there are no short cuts in this business. Make sure to review demographics from a market AND submarket perspective. Review trends in average age, household size and income. Look at absorption and permits, traffic patterns and perceived "SES" (socioeconomic status) of the community.
How long to do you intend to hold? Of course you will consider anticipated hold time; what is difficult to consider is the limited amount of control we have over events that change our projected hold time. Thus, when considering term of ownership, please make sure to factor in an extended period based on all of those items "out of our control". Allow time for contemplation with respect to your intent versus the reality that envelopes real life.
Mr. Wilhoit is the author of two books: How To Read A Rent Roll: A Guide to Understanding Rental Income and Multifamily Insight Vol 1 - How to Acquire Wealth Through Buying the Right Multifamily Assets in the Right Markets.
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About This Blog: Multifamily Insight is dedicated to assisting current and future multifamily property owners, operators and investors in executing specific tasks that allow multifamily assets to operate at their highest level of efficiency. We discuss real world issues in multifamily property management and acquisitions. This blog is intended to be informational only and does not provide legal, financial or accounting advice. Seek professional counsel. www.MultifamilyInsight.com