With the recent foreclosures on a portfolio of Houston Multifamily properties totaling over $200m, I thought it best to remind everyone that unit count is NOT reflective of one’s capabilities. If you read my last post, you might be thinking, “Oh here she goes with another post on statistics”...well, YOU ARE RIGHT!! Similar to how I learned in my undergrad Statistics' class to always consider the source, I also learned: “Correlation does not equal causation.”
The example that drove this point home for me was when the teacher equated the rise in ice cream sales with the rise in crime. Does that mean ice cream sales cause crime, or better yet crimes yield ice cream sales? No, as the common underlying factor, also the root of the uptick, was warmer weather. People like ice cream on warm days (more so than cold ones), and crimes are often a result of opportunity (which warm weather provides an increase of people being outside).
So if unit count does not matter, what does? It boils down to three simple categories: Team, Market, and Deal.
For the team component, you want to look at one’s experience. Specifically, you want to identify if that team has experience and a track record with that type of asset class (so not just multifamily but heavy value-add repositioning), experience working within that market previously, experience working with a particular property management company, experience working together as a partnership previously, and are their interests aligned with yours (for example, do they have skin in the game). None of these items are necessarily deal breakers, but each will tell you the inherent risk your investment has based on the experience the team has.
Next is the market. With respect to the market the components you are looking for here concern the ease at which business can be conducted (for example with multifamily is it a landlord or tenant friendly state), population growth, job growth, economic diversity, median household income, median mortgage rate and so on. Market indicators can tell you the probability of an investment being successful if all other factors are strong.
Last, but not least, is the deal itself. The underlying assumptions on the particular investment are critical to understand. Did the team pick appropriate comparable properties? Do the rental projections look feasible? Does the business strategy appear that it can be executed? I know this may be difficult to ascertain without prior investing experience, so ask industry experts to help you. I have provided guidance to countless investors on questions to ask after reviewing an offering. Find someone who can serve that role for you.
Notice how I put the vetting in this order, and did not speak to picking an investment opportunity on the projected returns. Projected returns mean nothing if the fundamentals aren’t solid. I have learned that the hard way. I once was fooled by people touting thousands of units to build credibility. It took some time to realize that these numbers were not always indicative of investing security. To put this in practice, our company, Bar Down Investments, does not have a unit count goal. Instead our number one goal is driven by how much we return to our investors. That may not be as sexy as walking into a REI meet-up telling everyone that we have 7,500 units, but honestly who cares. I care more about what our current investors think, and by doing so I believe that we will never have to worry about attracting people through our number of units. I think Jennifer Lopez said it best, but I will modify it a bit for multifamily: don’t be fooled by the rocks (unit count) that I got, I am still BadAshInvestor from the block!