Deal flow. It’s the lifeblood of the real estate industry.
If you don’t have access to lots of deals on a regular basis, whatever other great skills you might have won’t amount to much.
Having good deal flow is one of the critical components that separate a truly high-performing real estate company from the rest of the pack.
It’s no wonder, then, that it’s one of the first questions people ask when they get started in the real estate business.
It’s pretty easy to get overwhelmed when you’re trying to figure out how to build your deal flow.
We’ve distilled the three most important elements you need to be paying attention to as you embark on this journey, so you can avoid analysis paralysis and move towards finding new deals with confidence.
The game plan is relatively simple and once you understand it, it’s all a matter of execution and persistence before you land your first deal.
1. Target Acquisition Size:
The first thing you should do is get an idea of the size of the properties you would like to target.
There are two elements to this.
The first is a logistical one: what is the level of debt and equity you and your team are capable of raising for your acquisitions.
On the equity side, you need to have a good idea of how much capital you can raise per deal from your investor base.
If you haven’t built up an investor base yet, you’re going to be extremely limited here, so it’s important to build those relationships with your potential investors ahead of time or you will have trouble calibrating what size deals you can handle.
On the debt side, you need to network with lenders and get a proper understanding of how large a loan you could qualify for.
The typical rules here are that the net worth of the general partners in a real estate syndication must be greater than or equal to the total loan amount.
There are also liquidity requirements that vary from lender to lender.
You also have to be aware of the current debt environment when you’re investing.
Speaking with lenders and staying in touch the the lending market is essential in order to underwrite deals accurately.
The second factor is the size of properties you and your team are capable of handling.
We advise people with the experience and know-how to go after larger deals because they are more attractive to both lenders and investors.
That said, if this is simply something you’re not capable of, there’s no shame in scaling your way up with mid-sized apartment acquisitions until you have enough experience to asset manager larger properties.
2. Dial in to Your Target Markets:
There are two pathways that lead people astray and cause them to experience analysis paralysis when they’re looking for a market to invest in.
The more familiar pathway is that they live in a market that isn’t favorable for investing, but lack the confidence to invest remotely.
If you’re reading this article, that probably isn’t your problem.
You know that remote investing is basically how it works at the highest levels and it’s all a matter of forging solid relationships with best-in-class property managers, contractors, and other professionals in your target market.
You might still get tripped up, however, because you spread your attention too thin.
There are many markets to choose from where the numbers make sense, so there’s an understandable urge to try to cast a wide net and focus on many markets at once.
This is only appropriate if you have a team large enough to give each market a dedicated level of attention.
If you’re a one man show, I can tell you right now that you’re not getting access to the best deals if you’re shopping in five markets at once.
You need to dive deep into one or two markets in order to get access to the best deals.
One thing to keep in mind is that if you’re going after the same markets everyone else is, you’re going to be facing some steep competition.
Even if the market itself has a solid amount of inventory, it’s worthless to you if deals are being snatched up by long-term institutional groups that have a stranglehold on the deal flow.
We like to go after satellite markets that have strong population growth and job growth, and economic diversity.
We cover a macro-level overview of what makes a market desirable in our Demand Generators for Real Estate Explained article.
Rather than competing with established groups in markets everyone is targeting, it might be more realistic to do your homework and find those satellite markets that have strong fundamentals behind them.
You can be a much more competitive player here and gain more attention from brokers.
Just remember that the housing stock and population need to be large enough to allow for deal flow in the first place.
We typically only target cities or satellite communities of cities with a population above 200,000.
You also only want to be investing in markets that are serviced by many property management companies.
This indicates the health of the industry, but also in practical terms creates competition that drives better management practices and allows for more choice for you as an investor.
The best thing about this is, if you dial in and find a market where you end up purchasing several properties, they can work synergistically together to benefit you.
Due to economies of scale, you might have access to higher-tier property managers and can also cut costs due to resource sharing.
This also makes the asset manager’s life much more simple during the monthly site visits they should be conducting.
See our 5 Steps to Asset Manage like a Pro for Multifamily Investments for more on that topic.
3. Broker Relationships:
I saved the best for last because this is the most important step of all.
You have to forge good working relationships with brokers – lots of them.
Before we dive in to how we do this, I first want to address direct-to-seller prospecting as well.
This is an important strategy that has allowed us to source some great deals, but the majority of good deals will be coming from commercial real estate brokers.
Going direct to the seller is more time consuming and requires more detective work on your part to track down leads, but there can be hefty rewards if you eventually find an amenable seller.
Like I said, though, you’re going to be getting most of your deals from brokers.
Once you’ve decided the markets to target, you need to do some research on who are the top commercial brokers in that market for the multifamily asset class.
This information is available on CoStar and in commercial real estate publications.
Next, you need to start reaching out and building those relationships. The important thing when dealing with brokers is being memorable.
You need to be the person they think of for multifamily deals.
One way to get brokers to remember you is to be extremely responsive. It might be obvious to you that you need to be ready to jump and submit an offer when they send you a great deal.
If you can’t make that move, then you’re never going to get anything done in the first place. Maybe that’s obvious, but it goes deeper than that.
When brokers send out a listing, the majority of the people on their list won’t engage with them.
Even if you don’t like a deal, you should be reaching out to the broker to discuss further.
You should be telling them why this deal doesn’t work for you, not in an annoying way, but rather to show that you’re very serious and enthusiastic about making a multifamily acquisition in their market and want them to know your parameters.
When you do that, the brokers know moving forward that you’re engaging with their listings and what types of properties you are targeting.
This will keep you at the top of their mind every time they come across a new opportunity.
Try to go above and beyond when dealing with brokers.
You need to build real relationships.
You can’t be too utilitarian about it – these are people and not just a means to an end for you.
If your broker views you as a friend or at least likes you as a person, you can bet that’s a leg up for you and your business.
Simply submitting an offer makes a broker take you much more seriously. We had two separate development projects we were eyeing, but we didn’t end up getting them because another buyer submitted a higher offer.
Submitting those two offers on this particular broker’s listings made him take us much more seriously.
Since then, he’s sent us multiple deals we’ve closed on, both development projects and multifamily acquisitions, that weren’t shopped on the open market.
Remember that, even if you have the biggest broker network on planet earth, you won’t be able to leverage it if your underwriting isn’t on point.
If you can’t analyze deals efficiently, you’re going to get discouraged very quickly. Spending a week analyzing a single deal isn’t going to get you anywhere, as you’re going to need to be capable of crunching the numbers on hundreds of deals a year to get the best results.
You need to be confident in your underwriting and stand on solid ground with your offer. Be prepared to lose many deals because of this.
Remember that just because someone else put out an offer with a higher price tag or looser contingencies than you, that doesn’t mean your strategy is unsound.
There are reckless buyers at every price tier in real estate, so resist the temptation to follow the crowd.
Yes, this does mean that those first few great deals you find will most definitely slip through your fingers.
That doesn’t mean you should get discouraged.
Combining patience with faith in your underwriting ability will pay huge dividends when you strike gold with an accepted letter of intent (offer) on a property that fits your criteria.
It’s also important to keep a dialogue with a listing broker even when another offer is chosen.
Deals often break apart in the early stages, so you should position yourself to be the first in line if that occurs.
Don’t bet on this, but if a broker knows you can get things done and are a serious player, you can even get discounted pricing.
Many sellers of multifamily assets are reluctant to put their properties out on the open market because they don’t want their tenant base to be aware of a possible sale.
If a seller is hoping for a quiet and quick sale with a serious buyer, it’s his broker that will vouch for which buyers are both trustworthy enough to keep the sale on the down low and has the funds and desire to actually pull the trigger and get a deal done.
That’s why getting down in the trenches, submitting lots of offers, and building real relationships with brokers in your market is so critical.
We use a CRM system to keep constant contact with all of the major brokers in our target markets.
You should be setting reminders for periodic check ins. You can’t be shy about this; be willing to put yourself out there, ask questions that show you are paying attention and to demonstrate your competence in the field, and hit the phones on a weekly basis to keep yourself at the front of the queue for each broker’s next multifamily listing.
TIP: Whenever you purchase a property in your market, spread the word to other brokers in that market that weren’t involved in the sale. This gives you instant credibility by showing them you’re actively on the hunt for new properties.