Realized Blog

5 Things to Consider Before Investing in a Multifamily DST

Posted by Colton Hoisager on Mar 7, 2019

 

In an environment of increasing property values and interest rates, realizing a return on real estate is becoming increasingly difficult for investors, whether it be an investment into direct property or a fractional ownership structure, such as a Delaware Statutory Trust. While this may be a concern for most, as 89% of investors put their money into real estate1, many are ignoring the crucial aspects of a real estate investment that go beyond the macroeconomic pressures.

From a property’s location to the strength of its tenant’s financials, assessing the competitiveness of a real estate investment takes more than comparing cash-on-cash returns among potential investments, as these numbers may not tell the whole story. To provide insight into what we think is important to consider, we have gathered a list of 5 things every investor should consider up-front and diligently before investing into a multifamily DST.

1. Renter Appeal and Visibility

Every successful real estate investment starts with demand. If there is no demand for the space you are looking to invest in, your investment is already sunk before it even began. There are several ways to increase the likelihood of tenants buying in, and more importantly stay in, and it all starts with a competitive advantage. Does the property offer better amenities than the development next door? Is the pricing of the rental units competitive? Along with this, ensuring that the property is marketed and branded effectively may increase the chances of potential tenants signing a lease. Looking into the track record of the property manager, or the other properties in their portfolio, may be revealing as to what to expect at the operating level of the property. “Sticky” tenants may lower resident turnover, which creates the potential to drive higher occupancy year-over-year, and thus top-line revenue.

2. Financial Statement Strength

When evaluating a potential investment, always request historical and forecasted financials when they are available. Look at the expenses and see if they have made sense in the past. Look at projections going forward, especially regarding rental growth, and see if they are reasonable when compared against other data in that market. Although a property may be paying a projected 7% cash-on-cash return, the numbers mean nothing if they can’t be supported by Reis, Axiometrics, or another respected real estate data source.

In situations where a property has not been professionally managed and financials are not readily available, seek professional opinion to obtain a credible valuation of the income and expense sources of the property.

3. Maintenance Costs

It is easy to view a DST investment in the same way as every other cash flowing asset in your portfolio. After all, you may see the bottom line return more often than the physical asset itself. However, real estate is a physical asset with tangible features that needs to be constructed and maintained for years to come. Before entering into a purchase agreement for a fractional interest in a DST, one should try to inspect the property, or have a trusted source inspect it, as well as take note of immediate and ongoing needs that will need to be replaced in future years. Usually this information can be found in the property condition report, or appraisal. By doing so, you can ensure that the property is sufficiently capitalized, so that capital reserves don’t run dry. This is especially important in a Delaware Statutory Trust, as there can be no additional contributions to the trust by either new or existing beneficial owners. Third-party reports, such as appraisals and property condition reports, may provide valuable information as to the state of the property, assessing any immediate or on-going capital needs.

4. Rent Roll

A property’s rent roll is always a good indicator as to how a property has been fundamentally performing. Revealing extensive information about tenants and leases, especially in multifamily properties, one can evaluate vacancy trends, as well as areas that are being underutilized that drive rent growth, such as parking. Not that this is always the case, but vacancy trends could also point to poor management by the prior property manager.

Along with this, rent rolls allow you confirm current property income streams. Since most brokers and appraisers use income as a way to evaluate a property, any discrepancy you may find in the rent roll may help you avoid putting your money into an overly risky investment.

5. The Story

Every investment property has a story to tell. From the submarket to its previous owner, knowing the history behind a property may provide more information than any due diligence can. Questions like “who was the prior owner, and why did they exit the property?” are what every investor should be asking. Knowing a property’s history may help you evaluate potential strengths, while allowing you to stay away from the property’s that have had weaknesses in its past. Remember, however, that past performance does not predict future returns.

These are just a few of the major things to consider before going to buy either direct or indirect property. With the amount of capital that is required to buy real estate today, anything less than evaluating these five concepts could result in disaster for your next investment into a multifamily property.

 

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Multi-Tenant Industrial: A Potential “Hot” Investment?

Posted by Drew Reynolds on Mar 1, 2019

When you think of the words “industrial real estate,” what comes to mind? If your first thought involves massive factories and production plants, you’re partially right. Industrial real estate encompasses a wide spectrum of property types, and includes warehouses, manufacturing buildings, and flex properties to name a few. Typically housing multiple tenants, this asset class is becoming a hot investment commodity, due to current pricing, growing demand, and mostly hands-off maintenance.

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Risk-Adjusted Returns: In Plain English

Posted by Drew Reynolds on Feb 25, 2019

Picture this.

You are with your financial planner, talking about different ways in which you can boost the power of your investment portfolio. Then he or she throws out the term “risk-adjusted returns” when asking about investment decisions.

If you are scratching your head about risk-adjusted returns, tell your financial planner you will get back to him/her. Then, read this article.

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Understanding Illiquidity in Real Estate Investing

Posted by Colton Hoisager on Feb 19, 2019

*Update February 2019: Realized has established its Secondary Market and has completed its first Secondary Market transaction.

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Self-Storage, The Modest Investment

Posted by Colton Hoisager on Feb 15, 2019

You probably see them as you travel the interstates, highways and byways across the United States. Their low-level buildings boast many roll-up doors, painted in various bright shades of green, yellow, blue or orange. The on-site signs offer all kinds of inducements encouraging you to store your worldly goods there.

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Benefits and Risks of Fractional 1031 Investments

Posted by David Wieland on Feb 11, 2019

*Update February 2019: Realized has established its Secondary Market and has completed its first Secondary Market transaction.


Fractional 1031 investments are subject to the same benefits and risks as other real estate investments. However, the structure of fractional 1031 investments have their own unique characteristics.

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Is Multifamily a Logical Investment?

Posted by Clay Schmidt on Feb 8, 2019

Multifamily homes are being touted as great opportunities for investments, and for good reason. Real estate market trends point to an increase in renting over home ownership1, meaning that multifamily assets can provide steady income flow as occupancy rates increase. As a result, investors are looking to make multifamily ownership a part of their portfolio. According to Real Capital Analytics, apartment sales through the first half of 2018 totaled $69.9 billion, a 7.9 percent increase compared to the first of 2017.2

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A DST For Your Cash Investment

Posted by Drew Reynolds on Feb 4, 2019

*Update February 2019: Realized has established its Secondary Market and has completed its first Secondary Market transaction.


Much of what we write about focuses on exchanging from a real estate holding into a Delaware Statutory Trust (DST). Thanks to Internal Revenue Code, Section 1031 and Delaware’s statutory law, you can defer capital gains taxes from the sale of your property, without stressing to find a “like” property in a 45-day period. Additionally, that DST gives you the perks of property ownership, while avoiding the “terrible Ts” of toilets, trash and tenants.

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Realized Announces Development Of Secondary Market

Posted by The Realized Team on Jan 31, 2019

Goal of improving liquidity of secondary sales.

Realized has recently developed a secondary market to provide current Delaware Statutory Trust (DST) investors with an opportunity to sell their interests to accredited investors. While the secondary market provides no guarantee for sale, and DSTs are still classified as an illiquid investment, the market’s goal is to increase the liquidity of DST interests in order to make the investment process even easier and more investor-friendly.

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E-Commerce: Not the End of Retail Real Estate

Posted by Drew Reynolds on Jan 25, 2019

Some real estate experts have been in “sky-is-falling” mode when it comes to brick-and-mortar retail. The media seems to be following suit, regularly reporting bankruptcy filings for, and closures of, retail chains. Take Toys R Us as a recent example, which announced it would close all its stores and liquidate inventory in March of 2018.

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