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Answering Your Questions: Guidance for New Investors

Newcomers to the real estate investing space often have a lot of questions. And we totally understand! There’s a lot to learn and become educated on when you decide to jump into real estate. We aim to make the information on The Executive REI Show as helpful and actionable as possible. That’s why we routinely take questions from the audience and answer them on an episode of the podcast.

In Episode 35 of The Executive REI Show we answered some audience questions surrounding different asset classes, how to make your first deal, if small apartment buildings are a good investment, and more.

Are small apartment buildings (less than 100 units) a good investment?

There is no real “right” or “wrong” asset class to invest in. Good rates of returns can be achieved with most, as it all comes down to how a deal is structured and other factors. That said, higher rates of return are often achieved more easily with larger multi-family buildings with over 100 units because they benefit from economies of scale.

Small apartment units require more hands-on work and are good for someone who wants to retain direct control over their investment. They often fail because of the management aspect, as an on-site manager is rare for small apartments. That said, the owner needs to invest in a good building manager, even if they’re not going to be there full-time. Hire someone from a reputable company with a proven track record to ensure they are caring for the building and tenants.

How has COVID-19 affected the rate of return on multi-family and commercial projects?

COVID-19 did shift the real estate landscape, but most investments fared well overall, and the rate of return was good. The main differences were between various asset classes. Here are some changes due to COVID-19:

  • Demand for office space decreased because of work-from-home arrangements.
  • Retail space also changed, but not as much as people think. Despite the move to online retail, storefronts are still in demand.
  • Hospitality industry has rebounded back after a significant slowdown.

As a new investor, how do you get your first deal? How do you get brokers to take you seriously and advocate for you?

This is a question that is common among new investors. After all, there are a lot of demand in the real estate industry, specifically around multi-family syndications.

Given this demand, the question really becomes: what will make you stand out from the crowd? Brokers are in conversation with many different investors, many of them new. So, it’s important that you set yourself apart from the crowd, get to know the broker, and show yourself to be reliable. People like doing business with other people that they know, like, and trust, so focus on building a solid relationship with a broker to do business.

What is the best way to obtain leverage?

When thinking about leverage, it’s important to understand the role of a lender. They are there to lend money because doing so will earn them money. So, the main thing they will focus on is if your project will earn returns.

The best way to really understand lending and leverage is to talk to the source, or to someone who knows more than you do. Here are two ways to do that:

  • Speak directly with lenders and ask all your questions. It’s likely you’ll have 10-15 conversations and perhaps fall on your face. They may tell you that you aren’t ready or don’t know enough—that’s okay! You’ll learn and gain more knowledge than you had before.
  • Speak with a broker. They have the knowledge and information about leverage and loans, so you can ask them any question you might be nervous to ask a lender directly about.

What are you seeing in cap rate changes across asset classes?

Cap rates, or capitalization rates, tell you the approximate rate of return on an investment. They’re calculated by dividing the net operating income by the market value. Generally speaking, cap rates have been depressed and decreasing across the board over the last few years.

It’s hard to predict exactly what will happen in the future though, especially given the uncertainty about interest rates. While we’d all like a crystal ball to predict the future, it’s impossible to do! Focus on the deals themselves and whether they are solid, trustworthy, and prudent choices.

Conclusion

To the new investors out there: keep asking questions! The only way to succeed in real estate investing is to keep learning and expanding your knowledge. If you want one of your own questions to be answered on an episode of The Executive REI Show, make sure to click HERE and submit your questions!

Michael Holman

Michael Holman

Michael has extensive financial and operational experience. He is a licensed Certified Public Accountant and has a Masters of Accountancy from Brigham Young University. Before working at Overland Group, Michael worked at Ernst & Young on some of the largest real estate and technology companies in Utah.
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