Learn how refining your real estate focal point can lead to greater portfolio returns
Houston, Texas -Recently, investors have been seeking diversification within their portfolios due to the current investment environment and global uncertainties. Historically, real estate has provided a unique, alternative diversification option, however, this well-known, generally slow-paced industry has found itself with a massive influx of new capital as of late.
The market has become hyper competitive, especially in hot STEM zones like Austin. The demand-driven population influx paired with the limited supply of housing has drawn investors’ dollars into the multifamily space. For those who are new to the multifamily space or real estate investing in general, the industry can be difficult to navigate.
Below are four key points investors should keep in mind when chasing deals in this growing market.
Focus on rent growth
Capital inflows into real estate can be measured by visualizing the cap rates, the real estate financial ratio. Cap rates are defined by Net Operating Income divided by the current market value of the property. The lower the cap rate, the higher the implied valuation for the property. When there is more demand than supply for properties, cap rates will compress. While capital inflows support valuation acceleration, rent growth is the primary driver for Net Operating Income and cash-on-cash-return.
Focus on where current rents are, population growth and where you think rents might be in three, five and 10 years. If you think you are adding value to the property to increase rents, be sure to include this assumption. Rent growth is what will drive cash yield and support a higher property valuation. If you can push rents with efficient expense management, valuations will eventually be forced to follow.
Focus on your location - not someone else’s
We’ve all heard it… so I’m not going to write down the typical three rules to investing in real estate. Instead, I have a new three. Insight, insight, insight.
So many newcomers to the real estate space focus on location, which is fine, but you also need to focus on your location. I’m sure investing in real estate on the California coast is a great location and they are not making any more coastline, but what insight do I have into rents and regulations on the California coast?
Put your efforts into buying in areas where you have that insight. You know the market inside and out, and understand its value. Your local insight is your edge as a novice (or seasoned) real estate investor.
Focus on the customer
Put your focus on your customer - your residents. Your residents should be creditworthy as they are the collateral for your investment. Your residents’ income needs to be on the rise or in a market where you believe their income will rise soon.
Target properties where rent is below 20% of income is a great place to look. This target assures that there is some room to push rents and drive cash flow in your investment.
Stay focused in a highly competitive market. Chasing investments is where investors' dreams turn into nightmares. Instead, change your mental target to zone in on the customer’s needs and what their ability to pay for your product will look like in the years to come.
Focus on you – invest with conviction
Similarly to focusing on your location and not others, an astute investor should be focused on what they know best. I’ve been very fortunate in my real estate career, however it did not come by chasing coastline properties in California or dreams of exiting for millions. My heart has always wanted to be, and still wants to be, in the real estate business. Don’t lose your focal point when entering a highly competitive market. Some of our best buys have come in lower interest rate environments where we had insight and invested with conviction based on our theses. Keep your aim on the target and execute.
The Barvin Focal Point
A final note for honing in on your real estate investing skills. Consider the following:
With whom are you investing?
Do they back their own investments?
Is there a track record showing consistent returns?
It’s important to partner with a vertically-integrated operator with a successful track record and the right focal points.
At Barvin, our main focal points are our investors and the communities in which we invest. What are yours? Feel free to share your thoughts with our team.
If you are interested in learning more about how Barvin’s real estate insight can add value to your investment portfolio, please reach out to Kate Kelm, our Director of Investor Relations at email@example.com or 832-487-0902 to learn more. We’re happy to be a guiding resource for insight into the multifamily real estate market.