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Choosing a Real Estate Investment Partner? Six Questions to Ask

Before you entrust your funds to a real estate investment partner, ask some questions.

First: Is your real estate investment partner an Allocator or an Operator? There is a big difference.

Allocators distribute capital on your behalf to Operators. Allocators seek the best operators and invest, on your behalf, in whatever funds and deals operators bring to them. Allocators make sense if you are a pension fund (or similar) with no expertise in real estate investment. You are basically outsourcing that function and knowledge; however, it comes at a cost. You have no input in asset selection or fund strategy. And of course, the Allocator charges fees. This adds an additional layer of costs to you, and these fees come out of the investment thus reducing your returns. An Operator, on the other hand, is the preferred solution if you have the resources to analyze a specific fund or an individual deal. If you invest directly with a real estate operator, you will not only save a layer of expensive fees, but also get to choose a fund investment strategy, (or particular asset), its geography, investment term, and even the potential returns. But be careful how you choose an operator. They are not all the same.

Six questions you should ask your operator:

  1. Focus. What asset class do you specialize in?

If the answer is “retail, industrial, and student housing…” Run! An operator must be an expert in a specific asset class.

  1. Market. What markets do you specialize in?

The same applies to markets. A real estate operator must have a physical presence in the target market to really understand its nuances and trends.

  1. How long have you been in business? In the specific asset class? In the specific market?

Experience is priceless.

  1. How many economic cycles have you experienced? How did you weather the market crashes of early ’90s and ’08?

Real estate is great while the market is booming. Does your operator know what to do in a crash?

  1. Who manages your investment properties? Do you outsource to a 3rd party management company?

There is no substitute for your own, on-site management of your assets. As a wise farmer once told me, “The best fertilizer is the farmer’s foot on the soil.” This applies to property management, as well. You must have your foot – and your hands, eyes, and ears — on the property, at all times. The 3rd party manager has no skin in the game. It’s not his money at risk if there is a budget shortfall.

A word about property management: It is local, hands-on, and very difficult – and probably the most important aspect of a real estate investment. Your management team, especially at the site level, is critical to your property’s success. Few investors/operators pay enough attention to this fact. Let me assure you, it’s very, very difficult to assemble the right team. I can hire 1,000 financial analysts more easily than one, excellent on-site property manager. It’s that hard.

  1. How much of your own money are you putting in the deal?

Most sophisticated investors want to see the operator have money in the deal. It gives them comfort knowing that if the investment is not successful, the operator will share the pain.

At Lloyd Jones Capital, we always invest alongside our real estate investment partners, but, in fact, maintaining our good reputation and strong track record is what motivates us to succeed. With the transparency in the market today, an operator’s reputation is far more valuable than his money.

In summary, when choosing a real estate investment partner, ask these questions and remember:

Real estate is local and hands-on. Your partner should be, too.

Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real estate operator that specializes in the multifamily and senior housing sectors. Headquartered in Miami, the firm acquires, improves, and operates multifamily real estate in growth markets throughout Texas, Florida, and the Southeast. Its affiliated management group is an Accredited Management Organization (AMO®) with a thirty-five-year history in multifamily real estate.

Skip the Flip in Multifamily Investment

It’s time to go long.

Historically, multifamily investment has been about long-term, cash-flow returns. However, in recent years, as the industry caught the eye of private equity, the emphasis turned to a property’s IRR or Internal Rate of Return.

The “fix and flip”, the “value-add” became the standard: short hold, quick fix, big return. And the multifamily real estate buying frenzy began. The strategy has proved to be very profitable over the past five or six years, but in my opinion, those days are (almost) gone – for several reasons.

TODAY, THERE’S NOT ENOUGH MEAT left on the bones of C and B properties to ensure investors of increased rents and resultant returns. The fix and flip strategy had been to buy an apartment community and execute a “value-add” to approximately 20% of the units, thus leaving “meat on the bone” for the next investor. At the same time, the investor would raise the rents to cover the cost of the improvements. So rents increased, NOIs rose, prices went up, and the buying frenzy continued.

The next investor then thought he could upgrade another 40% of the units. But in fact, as cap rates fell and he had to pay more for the asset, he had to rehab 70% or 80% to reach his hurdles, leaving almost nothing left for the following investor. Consequently, today, after a couple of “flips”, most “value-add” deals don’t make financial sense.

RENTAL RATE INCREASES  Because of demand, rents have risen sharply in nearly every market, but according to economists, that increase should moderate to about 3.5 to 4% due to new construction coming online. Consequently, investors cannot assume drastic rent increases in their acquisition proformas. If it doesn’t work now, it won’t work in the future.

THE ECONOMY:  We’re long into our economic expansion cycle having exceeded the historic five-year average, but today in the US, growth is virtually stagnant. Are we reaching the peak? The good news is that multifamily real estate will continue to be among the strongest asset classes (if not #1) for reliable, steady returns regardless of the stage of the economic cycle. Why?

DEMAND: There is still an unfulfilled demand that is expected to be with us for a long time. That is the multifamily investment’s ace in the hole. Seventy-five million millennials plus another 75 million baby boomers. The multifamily rental business is poised to perform better than any other asset class. We have all read about millennials and their student loan debt and inability to afford a home. I personally think it has little to do with money. It’s about lifestyle, flexibility, and priorities. Young people want flexibility to move to that next job; they want amenities and social interaction. A house is not a priority to them. Retiring baby boomers, on the other hand, have “been there; done that.”  They are ready to free themselves from the burdens and expenses of home ownership. Whatever the reason, more people are renting today than at any time in the past 51 years.

INTEREST RATES: This brings us to interest rates – a very key and important ingredient in real estate investment. Who knows what might happen next? Answer: Nobody. One thing we do know: there’s little likelihood of a reduction in interest rates, although it’s not impossible. In Europe, where the real rate is in negative territory, some banks are considering storing money in their vaults because of the negative yields. It costs them money to make loans! And the US is getting close to that level. (See my blog post from June 14, 2016, titled “Is it time to keep your money under the mattress?“) But luckily for the multifamily investment industry, this big question mark can be taken off the table. We can counter the risk by locking in fixed rates today. We know what our debt will be for the duration of our investment.

So what does all this have to do with “going long”?

Multifamily investment is probably the most stable, reliable investment one can choose. But the strategy has changed. It’s time to “go long.” Forget about the unrealistically high-return value-adds so prevalent at the beginning of this cycle. They no longer exist. Lloyd Jones Capital recommends buying quality properties that produce consistent cash flow. Focus more on yield than IRR. Consider a long-term hold and do not over-leverage. Then, assuming good management, you should enjoy a reliable, long-term return on your investment.

Christopher Finlay is Chairman/CEO of Lloyd Jones Capital, a private-equity real-estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, manages and improves multifamily real estate on behalf of its institutional partners, private investors and its own principals. Headquartered in Miami, the firm has operations throughout Texas, Florida and the Southeast. For more information visit: lloydjones.wpengine.com.

Lloyd Jones Capital Acquires Two Texas Apartment Communities

Miami, Fla. – Lloyd Jones Capital, a private equity multifamily real estate firm headquartered in Miami, Fla., has acquired the Carol Oaks and the Villa Oaks apartment communities in Fort Worth and Houston, respectively. Both are considered exceptional value-add opportunities which the company anticipates improving and rebranding in order to enhance the asset value.

Says Chris Finlay, Chairman/CEO, “These properties are a great fit for our value-add portfolio. They are both currently producing cash flow, and with selective renovations and exciting rebranding they will prove to be fabulous opportunities for our investors.”

The Carol Oaks is a gated community consisting of 224 units on 18 acres. The property is undergoing rebranding to the company’s proprietary ‘The Vibe” concept that offers on-site, high-tech opportunities for its residents with Wi-Fi and collaborative work areas. The property’s new name is The Vibe at Landry Way.

The Houston property, Villa Oaks, with 212 units of affordable housing will be rebranded as TownParc at Sherwood. This townhouse community offers large units with numerous floor plans.

According to Finlay, two additional properties – in St. Petersburg, FL and Houston – are scheduled for closing in the next few weeks. These will add an additional 610 units to the company’s growing investment portfolio. Finlay says “One of the things that gives us great confidence in the ability to turn these C and B properties into C+ and B+ assets is Finlay Management, Inc., our property management arm.” He explains that Finlay Management is an Accredited Management Organization (AMO). In fact, the company was named “AMO of the Year” of North Florida in 2013 by the Institute of Real Estate Management (IREM).

 

ABOUT LLOYD JONES CAPITAL

Lloyd Jones Capital is a private equity real estate firm that specializes in the multifamily sector. With 35 years of experience in the real estate industry, the firm acquires, improves and operates multifamily real estate in growth markets throughout Texas, Florida and the Southeast.

Lloyd Jones Capital provides a fully integrated investment/operations platform. Its property management arm partners with the investment team to provide unparalleled local expertise in each of its markets. Headquartered in Miami, the firm has offices throughout Texas and Florida. The firm’s investors include institutional partners, private investors and company principals. For more information visit lloydjonesllc.com.

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