The Property—Assessing Market, Location, and Supply for Real Estate Syndications

August 17, 2024

This is Part 4 of our four-part series on the 4Ps Framework for Evaluating Real Estate Syndications. For the complete guide, including a glossary of terms and a cheat sheet, download our free ebook: The Apartment Investor’s Guide.

In real estate syndications, the property’s market and location are pivotal to its success. This final installment of our series focuses on evaluating the property itself—analyzing its market, location, class, and the dynamics of supply and demand. Here’s how to ensure that the property you’re considering aligns with your investment goals.

Why Assess the Property?

Market & Location: Evaluating Investment Potential

When investing in real estate, the market and location are often more critical than the property itself. Here’s what to look for:

Strong Employment and Population Growth: Check for positive trends in unemployment and population growth over the past five years. Avoid areas overly reliant on a single industry, which can lead to economic vulnerability. Use resources like census.gov for reliable data.
Area Median Income Levels: Higher median income indicates a market’s ability to support rental increases. Properties in lower-income areas (C class and below) should be managed by sponsors with specialized expertise.
Desirable Amenities: Evaluate proximity to transportation, retail, entertainment, quality schools, and low crime rates. Use Niche.com to gauge the quality of the area. Properties near major retail or infrastructure projects often have added appeal.

Red Flags: Watch for:

Declining employment rates or population.
High-end properties (A or B class) located in lower-quality areas (C class).
Operators without deep expertise in managing lower-class properties.

Class & Age: Understanding Investment Risk

Property class and age are critical factors in assessing risk and potential returns. They influence investment stability and management requirements.

Correct Property Class Categorization: Ensure clarity on the property class (A, B, C, etc.) and understand what each classification entails. Operators may sometimes downplay the risks associated with lower-class properties. Refer to our glossary for detailed class definitions.
Risk Mitigation Plan: For Class C properties, look for strategies addressing deferred maintenance, higher operating expenses, and success with the tenant profile. For Class A properties, be cautious of thin cash flow and potential competition from new developments.

Red Flags: Be cautious of:

Cap rates that don’t align with the property class.
Deferred maintenance and outdated infrastructure in older properties.

Supply & Demand: Gauging Market Dynamics

A thorough supply-demand analysis helps predict a market’s direction, essential for making informed investment decisions.

Declining Vacancy Rates: Lower vacancy rates suggest a strong rental market. Target areas with vacancy rates below the national average for better investment prospects.
Rent Growth: Look for consistent rent growth, which indicates a healthy market. Be wary of large rent spikes due to temporary factors like the pandemic; long-term trends are more reliable.
New Construction Data: Review year-over-year permits for new apartment construction in the vicinity. While some new supply is beneficial, excessive development can lead to oversupply and put downward pressure on rents.

Red Flags: Watch for:

Increasing vacancy rates or decreasing median rents.
Excessive new construction that’s not being absorbed by the market.

This concludes our four-part series on the 4Ps Framework for Evaluating Real Estate Syndications. For a comprehensive understanding, including detailed explanations, a glossary of terms, and a cheat sheet, download our free ebook: The Apartment Investor’s Guide.