As we find multifamily investment opportunities, it is important to note that one shoe doesn’t fit all when it comes to investment criteria. When we look at a deal, what may be paramount to us as owners, operators, and investors are how we allocate where to invest and what to put our energy. However, regardless of how great we feel our investment is, it is critical to understand the different elements of each investment that ultimately may make or break items for each of your investors.
Each investor will have their own set of criteria that will be important to them and below is a list of elements they will consider when deciding if this is the right investment for them.
Cash Flow – Investors may look to have a certain level or percentage of cash flow year in and year out on their investment. Some investors may be comfortable partaking in smaller distributions or no distributions for the first year or two while the repositioning plan takes place while other investors may look for investments that from day 1 will have the opportunity to pay out distributions.
Profit at the sale – There may be a certain level or percentage of return that each investor will be comfortable waiting for a large payoff at the end of the hold period while other investors may look to have cash flow throughout the hold period and then subsequently a smaller profit at the sale.
Return of capital – Investors may seek deals that show a cash-out refinance or opportunity to have capital returned earlier in the investment stage even if this reduces their overall ownership in the project after the fact.
Depreciation – The ability to accelerate depreciation using a cost segregation study may be a vital tool for investors who are subject to large upcoming tax consequences.
Portfolio diversification – The ability to invest in hard assets or into multifamily real estate in contrast to other investments in stocks, bonds, crypto, or other types of real estate may be the main driver
Hold period – the length of your project may be crucial to their investment choice. Certain investors may see comfort in a ten-year hold noting the consistent cash flow or opportunity to have their money invested for a long period without having to seek more investments with a shorter hold period while other investors might deem a shorter hold best so they can continually rotate their funds
Liquidity – the illiquidity of your multifamily opportunity may be a deal breaker for some investors who like the option to be able to move in and out of opportunities like the stock market at their discretion. Tokenization of real estate may be a future solution to watch out for in the future for use as part of your investments.
Return metrics – Investors may have a certain return threshold they seek at minimum to invest in a project. This could be yearly cash on cash return, a multiple on invested capital, or an internal rate of return hurdle.
Timing – Although they may want to invest, they may not have the funds available or they have allocated all the resources they deem appropriate for this asset class this year or as a percentage of their investment holdings. Also, investing in this calendar year may have tax advantages or disadvantages.
You – Do they know, like, and trust you? This may be a key piece of the puzzle, regardless of any or all of the elements above. You will have people who choose to invest solely in their relationship with you.
Each of these elements may serve as a reason or reasons why investors may choose your multifamily investment over other like-kind investments or if to even invest at all. As you can see, you may feel you have the best investment on the planet but there are so many different reasons why it may not align with investors at this time.