The following is adapted from Syndicating Is a B*tch.
With little experience of the landscape, you may not understand what you’re looking for—or where to look. It’s cliché to say that location is a key consideration in any real estate purchase, but that’s because it’s true. The neighborhood you choose to buy in can radically impact the success or failure of your investment. In this article, we’ll walk through the factors you should have in mind when you’re considering where to look for your first property.
First-Time Deals Are Relatively Small
The first thing you should think about is how far you’re willing to drive on the regular to visit your property. This may seem like a trivial concern. It won’t be if you choose a property too far from where you live.
To explain why, let’s break down first-time income potential. We’ll make the numbers easy for the purposes of this example. Imagine you’ve decided to syndicate a ten-unit property at $100,000 per unit, giving you a total cost of $1 million.
To get your first deal, it’s going to take approximately 30-40 percent of the total purchase price in order to cover down payment, closing costs, operating capital, and any rehab money your lender won’t let you roll into your loan.
So in this example, you and your investors will collectively be in for $300,000. We don’t want to make the situation any more complicated than necessary, so let’s say that everything goes smoothly, your up-front money is reimbursed in a timely fashion, and it’s time to look at returns.
We’ll estimate that your ten-unit property generates about $2,000 a month (as a very broad rule of thumb, $200 in free cash flow per unit will be close), and you’ll get about $400 of that free cash flow or “profit” per unit off the top. This fee is known as the promote, and it’s your dividend for running the show.
The remaining $1,600 will be divided up amongst the investors. If you, as an investor, put in 10 percent, that means you’ll get another $160 a month. That’s it. While you get your feet under the table with your first property, you’re probably looking at a return of about $500–$600 a month.
Bottom line: first-time deals are smaller, and so is first-time cash.
Don’t Burn Yourself Out
Syndication is not a “get rich quick” scheme. You need to start small(ish), and build on that experience gradually. If you think you can shortcut that learning curve, think again. The math stays the same when the property changes, but the risks increase. The same scenario for a hundred-unit property would bring you $5,000-$6,000 per month—much more reasonable in terms of income and budget.
You might be able to get in the door for more the first time around if another syndicator—who has experience in the asset class you want a loan for—will co-sign the loan for you. The bank will be happier with that added experience in the deal, but your co-signer will need to be paid for the risk they are assuming, even though they will likely be silent in the process itself, and you’ll have a bigger property to figure out your first time through. It’s not ideal.
Now that you understand the kind of money you’ll bring in on your first deal, can you really say that you’re fine with driving three, four, five hours to get to it? You might need to make that drive three or four times a week in the beginning. Are you going to do it for $1,000 a month, or less? It might be fine in the beginning when it’s new and you’re excited, but that’s not going to last.
If you burn yourself out, you’ll wind up walking away. The deal will die, you’ll throw your hands up and say it didn’t work, and you’ll never do one again—all because you chose the wrong first deal. Some of this can be overcome by hiring a third-party management company, but you still need to be able to get to the property on a fairly regular basis to ensure the management company is doing a good job.
For the relatively low income you’ll make on that first deal, stick to properties that are close to where you live. You need to get to them for all of the back and forth necessary to close a deal, and then continue to check on them even after the property management company takes over the day-to-day, on-site tasks.
Select Your Area Carefully
I live in Austin and mentor many people in Texas who are interested in syndication. When people in central Texas look into buying their first property, invariably, they’ll come to me, all excited about their find. And it always seems to be in Killeen, Texas. Why do they find Killeen? Because it’s the cheapest in the entire area. It’s the cheapest for a reason, and I almost always tell them to keep looking.
Here’s why: you want to skip over any areas that are overly reliant on a single employer—and that includes the military. Killeen is home to one of the nation’s largest military bases. What happens if there is a mass deployment where a large portion of the military people take off and the spouses move to be closer to mom?
Or, to get even closer to home, think about January 2019, when the government shut down for over a month. If it had extended even a week or two longer, a lot of properties that are overly reliant on government employees would have been in trouble. Loans are due whether or not rent is collected, and everyone from the military to federal employees to welfare recipients were affected.
As COVID-19 has illustrated so graphically, some risks are hard to predict and have the potential to be devastating. But you can at least exercise careful foresight and plan ahead to head off as many risks as you can.
Look five years down the road when it’s time to sell your property. If the town is stagnant, what do you think property values will look like five years from now? They’ll probably be right where they were when you purchased the thing, and you’ll have to sell it at the same price you bought it for. That’s not why we invest in real estate.
A Thriving Community You Know Well
Let’s summarize. You’re looking for a location within reachable distance of where you live, without obvious, avoidable risks. Whenever you can, go for the thriving, growing communities. Go where the young people are moving, not where they’re leaving. As soon as a kid graduates from a dump of a town with no opportunities, they can’t wait to move. Even the good towns lose kids to cities like Los Angeles, Austin, Nashville, and New York.
Research the median household income. You want to buy in an area where median income is equal to three times your rent or more. If your rent is $1,000 a month, average annual salaries should be at least $36,000 within a mile or two of the property. That’s the range where people can comfortably pay rent, and rent is what keeps your asset alive.
You may live close to an area like this. I’m lazy and don’t like to do a lot of unnecessary research, which means I buy in my own backyard whenever I can. I know everything about this area and where I do and don’t want to buy because I live here. Because I’m in Austin, that works for me. It might not be the case for you, so plan on doing some heavy research for any location that you’re not already deeply familiar with.
Above all, don’t underestimate the importance of choosing a location for a deal, especially your first deal, which will color your experience of syndication and shape your future in the industry.
For more advice on where to find properties to invest in, you can find Syndicating Is a B*tch on Amazon.
Known in the real estate world as the Apt-Guy℠, Bruce Petersen is a serial syndicator who started with a 48-unit building and has now syndicated over 1,100 units. As the founder and CEO of Bluebonnet Asset Manager LLC and Bluebonnet Commercial Management, Bruce has received local and national recognition for his syndication efforts. He was the recipient of the Austin Apartment Association’s Independent Rental Owner of the Year for 2016 and the National Apartment Association’s Independent Rental Owner of the Year for 2017. In addition to being a TV personality and public speaker, Bruce also mentors people on how to invest in apartment complexes.
(Royalty-free image: https://unsplash.com/photos/TrhLCn1abMU, credit: Unsplash / @dead__artist)
