How Do You Know a Deal is Good?

Is your inbox full of real estate investment deals from lists you’ve joined but you just can’t figure out what really makes sense?

Or maybe your friend calls you up and has “the deal of a lifetime” – how do you know?

Feeling unsure or even intimidated to “make the right call” with your hard-earned savings is completely normal. It’s a big decision with complexity and potential rewards that may seem daunting at first glance. 

Clover Capital is here to help.

Here are 6 key terms to look for in a real estate deal as an investor:

• Team Experience – Experience and reputation are huge.  It’s first because it is THE most important thing.  The team operating the deal isn’t going to change, so if you don’t have confidence in them, move on to someone you do.

• Off-Market – The property wasn’t publicly listed for sale.  The sponsor team got the property under contract without having any competition and they are likely getting very reasonable terms for it.

• Value-Add – The value-add investment is the purchase of a real estate asset with the intent to create additional equity through operational and physical improvements. The concept is simple: buy low and upgrade the asset to sell high.

• Location, Location, Location – This holds true in commercial the same as residential.  A strong market where population growth, job market, and the local economy are all moving in a positive direction is a boon to any investment.

• Rent Growth Assumptions – Every market and type of investment has different rent growth.  This assumption has a big impact on your returns.  Deal sponsors doing their research will not just account for the last year, but also the past 5-10 yrs of history.  For multifamily apartments in the Southeast US, 1-3% is a typical rent growth number to look for.  More than that and the sponsors owe you a deeper explanation as to why they are so good at predicting the future…

• Exit Cap Rate – A bit more technical, but the simple tip here is look for an Exit Cap number higher than what it is being bought at.  Both numbers are shared in any legitimate pitch.  This is a “big lever” in how returns are calculated.  If Exit Cap is less than or equal to Entry Cap during the investment pitch, beware the numbers are likely quite non-conservative.  Ask more questions (of the sponsor and others in your network) to understand if it’s real or too rosy of a picture.

Curious about other terms from an investment offer?  We’ve created a quick reference here – just for you!

There are a lot of good multifamily investment deals out there.  RE investing is a fantastic way to get a strong return and diversify your portfolio while benefiting from tax advantages.  There’s a reason the majority of high-income earners invest in it! 

However, you’re looking for a property that will get you results that work for your goals.  To get that, it’s important to take your time and make the best decision for your situation.