Deal sourcing is usually the hardest part of real estate investing. It takes patience, discipline, creativity, and relationship savvy. Naturally, this is the stage that separates the wheat from the chaff.
That said, most budding real estate investors, particularly those making the switch to commercial, just don’t know the rules of the game. These tips should help ease the transition.
Create a Clear Investment Criteria
Investors waste most of their time looking at and dreaming about deals that don’t fit their expertise or platform specialization.
You’ll look at everything as you get started, but you should quickly reduce the scope of your search to build efficiency in your sourcing process. Use the following to start limiting your investment criteria.
- Locations – market, submarket, and neighborhood
- Property type – asset class, sub-type, and quality
- Risk profile – core, core plus, value-add, or opportunistic
- Deal size – number of units, square footage, total capitalization, and equity requirement
- Business plan – self-managed, third-party managed, renovation, construction, lease up, stabilized, hold period, etc.
Make Brokers Work for You
It’s time to recruit your acquisitions team after you have a clear investment criteria.
Get out there. Meet and engage with every broker that could possibly source deals that fit your needs. Your mission is to build a fruitful, mutually beneficial relationship. More importantly, you need to get onto their A-list of investors.
- A-list: “Hey, I just got a BOV opportunity. Is this something you would buy?”
- B-list: “Hey, I just signed up a listing. Is this something you would buy?”
- C-list: Everyone else
You’ll start off in the C-list. Still, you can move up quickly by performing on deals and staying top-of-mind with frequent, authentic reach outs.
Build or Find a Reusable Underwriting Tool
A financial model can be simple or complex. Its most basic function is to create a solid cash flow projection. However, you can use it as a tool to direct your workflow and underwriting.
Many investors use “financial model” and “underwriting model” interchangeably, but that’s not always the case. A financial model is a component of the underwriting. However, underwriting consumes so much more than financial projections.
A robust underwriting tool will include market data, comparable analysis, capital structuring, and so much more. Excel is the gold standard, but more advanced tools, like Argus may be relevant in your niche.
Every successful residential investor knows the value of virtual assistants (VA) for skip tracing, prospecting, and basic research. Very few CRE investors are using this tool effectively.
Stack the deck in your favor by using the virtual assistants you know and trust to enhance your deal sourcing and underwriting process.
- Sourcing – process confidentiality and non-disclosure agreements, download deal room data, find and report on opportunities in public databases, like Ten-X, RCM, and Loopnet
- Underwriting – load up basic data to the financial model, research recent sale and rental comps, call around for asking rents and occupancies, research demand and supply dynamic
- Financing – prepare syndication documents, draft offering book for equity and debt sourcing, set up email blasts for lenders and investors
- Closing & transition – collect and manage due diligence information, review basic due diligence, prepare lease and service contract abstracts
Basically, a VA is good for anything you would hire a full-time analyst or paralegal to do.
Hang Around the Rim
Deals fall apart.
All… the… time…
The best investors hang around the rim to get an opportunity to get the rebound at or below their initial offer.
Never give up on a deal because you lost in the competitive bidding process.
It takes months to close a deal. The broker will probably give you a heads up if it looks like the deal may fall apart if you’re on the A- or B-lists. This is a great way to get deals no matter the market or asset type.