Evaluate Real Estate Investment Opportunities Using: Who, What, When

Real estate investment opportunities are available in all types of markets. It just so happens we are in one of the strongest real estate bull markets ever.

As someone who believes the housing market will continue to stay strong for several more years, I've purposefully positioned ~40% of my net worth in real estate.

However, with all investments that carry risk, there are no guarantees. All of us must do as much due diligence as possible before making any investment decision. The greater the capital outlay, the more time we should spend evaluating various investment scenarios.

As someone who has been through several economic downcycles before, my worry goes up the better the market gets. During a bull market, it's easy to lose our discipline. The last thing I want is for all of us to think we're the next Warren Buffet of real estate investing.

Therefore, I've invited CrowdStreet, a leading real estate crowdfunding platform and FS partner, to share with us a logical real estate evaluation framework they use.

How To Evaluate Real Estate Investment Opportunities

If you’re an accredited investor, you have the opportunity to hand-select the individual deals that make up your real estate portfolio with platforms like CrowdStreet. But as the old adage goes, with great power comes great responsibility. Sorting through five, ten, or even 15 opportunities can be a little overwhelming, especially with deadlines to invest looming. 

So what are some of the first things you should look at in order to find the right deal for you and your financial goals? Let's look at how to evaluate real estate investment opportunities using a WHO, WHAT, WHEN framework.

There are many ways to properly evaluate real estate crowdfunding opportunities. Let us share an easy-to-remember framework. From this framework, you can then dig even deeper.

1) WHO Is The Sponsor?

With more than 500 funded and closed deals behind him – not to mention the thousands that didn’t make it to their Marketplace – CrowdStreet’s Chief Investment Officer Ian Formigle has one key piece of advice for investors: learn as much as you can about the sponsor behind the project.

Even if we at CrowdStreet love a deal, we need to like the sponsor behind it just as much. As an investor, you don’t need to know anything about the deal until you know about the operator.

CrowdStreet believes in this so much that we publish the track record of all the sponsors who have deals on our Marketplace. Below is an example.

How To Evaluate Real Estate Investment Opportunities

Just about anyone can do well when times are good. However, true leaders differentiate themselves when things start to go off the rails. We saw it happen during the Great Recession and we’re seeing it again with COVID.

Sponsor Experience Matters

Experienced sponsors who had strong relationships with their banking institutions were able to more easily navigate their loans or take advantage of the federal PPE program.

Those sponsors have been able to keep their projects afloat, even if they did have to hold a capital call. They know how to manage the pitfalls of a downturn. Ultimately, they are more likely to position themselves for success when the market rebounds.

So if a particular opportunity seems interesting, spend a little more time also looking at the firm behind the project. Here are some questions to ask about the sponsor.

  • Are they experts in this asset class? They’ll be less surprised by common pitfalls that might plague someone new to that space. Carefully evaluate the management of each sponsor. Make sure they have the relevant education and investment experience before participating in their real estate investment opportunities.
  • How many times have they successfully brought a project like this to a sale? There is a big difference between building a luxury apartment building from the ground up versus operating and improving a 20-year-old property.
  • Have they been tested by a downturn? Whether it’s was local (maybe supply outstripped demand) or national, sponsors who have survived through tough times understand how to move through the entire real estate cycle and win. If a sponsor has never done business during a downturn, then it's probably best to stay away until they have.
  • Does the sponsor have skin in the game? The more the sponsor has invested in a project, usually the better. You want the sponsor to be completely aligned with investors.

2) WHAT Does The Local Market Look Like?

Austin Metro's expected population growth

CrowdStreet has long believed in the power of 18-hour cities. These growing markets aren’t big enough to be dominated by institutional investors. But they can provide a substantial upswing for individual investors who are able to get into a deal.

Formigle adds, “Over the last few years, we’ve been gravitating towards a macrotrend thesis. When you catch a market on the upswing, you really catch it. For instance, we liked Austin three years ago, but we didn’t realize how much more we should have liked it.

There’s a reason it’s part of our Best Places to Invest report across multiple asset classes. Looking back, it should have been less of a surprise to our team just how successful Austin has been.

According to U.S. Census Bureau figures released May 4, Austin's multi-county metro population increased by 3% increase, making it the fastest population growth among metros with at least 1 million residents.

Here are some of the best states to invest in real estate based on migration trends and valuations that Financial Samurai put together. The “spreading out of America” is a long-term trend worth paying attention to thanks to technology and the greater acceptance of working from home.

Top states to invest in real estate by migration and valuation rankings

Be Very Attentive Of Micro-Markets

The flip side is when you’re looking at a super sensitive micro-market.

A few years ago, CrowdStreet had the opportunity to publish a student housing deal near a good, growing university that. By all accounts, it should have been a really successful project.

But everyone else had the same thought about this college town. Therefore, supply outstripped demand and rents actually went down as vacancies went up. College town markets are micro-markets. A few too many projects and it’s ruined, even at the biggest universities.

After all, there are only so many students each year and once there are too many beds there is no demand for new projects. Below shows how the supply of beds surged around five big colleges in 2020 when fewer students were coming to campus. Micro-markets are more susceptible to supply and demand shocks.

How To Evaluate Real Estate Investment Opportunities - Supply of beds between 2019 and 2020 for five major state universities

3) WHEN Will The Project Hit The Market?

When evaluating real estate investment opportunities, the final question you must ask yourself is when will the project hit the market. It takes time to build. Not only must you estimate when the project will finish being remodeled or built, you must also determine where the market will be once the project is complete.

As mentioned in a previous post on Financial Samurai, knowing where your investment sits in the real estate cycle really matters. As we come out of the pandemic, the real estate market is strong as demand outstrips supply. But this will not always be the case.

Real estate market cycles - Four phases

COVID definitely plunged the U.S. into a recession, albeit a slightly skewed one depending on where you sat. For multifamily properties, there was immediate concern regarding the prospect of spikes in vacancy rates and lease defaults given how unemployment numbers skyrocketed practically overnight.

But government intervention played a significant role in propping up this sector by providing significant fiscal and monetary stimulus, as well as by implementing an eviction moratorium. Consequently, rent collections never dropped below 93% in any month in 2020. Final collection rates are below, but still close, to 2019.

Multifamily Supply Declined As Well

On the flip side, fewer than 300 new multifamily projects broke ground last year, the lowest velocity witnessed since 2012. Urban construction saw the largest pullback in 2020 at around 50% below the three-year average. That means there will be a gap when projects hit the market.

This gap will likely lead to a tighter rental market in various cities, which is one of the main reasons why rents are also going up in addition to property prices.

Development projects that were able to keep moving during COVID will likely lease up quickly as we enter the recovery phase, especially in growing metros. There will likely be a slowdown in new deliveries beginning later this year and extending into 2022. This should keep the multifamily market tight.

However, eventually, new multifamily supply will come online. Imagine what would happen if one new building opened up in your town every month for a year. Now compare 12 new buildings all looking for all their tenants in the same month. It’s entirely possible those laggard deals will force the expansion phase and push us into hypersupply. 

Therefore, when evaluating a real estate investment opportunity, estimating the WHEN is crucial. Real estate development tends to move in boom-bust cycles.

Related: How To Evaluate Online Real Estate Investing Platforms

Hospitality Properties Making A Comeback

Hospitality properties were undoubtedly the hardest hit by COVID. Many hotels were permanently shuttered or taken offline and the new demand pipeline essentially ground to a halt.

But it is also likely to be the distressed asset class with the strongest bounce coming out of the pandemic. We’re already seeing travel numbers grow. More than 37 million Americans were projected to travel 50 miles or more over Memorial Day. This is an increase of 60 percent compared to 2020, the lowest number of Memorial Day travelers on record.

One AAA spokesman called it “revenge travel.” The combination of a substantial drop-off in new deliveries plus the removal of existing keys from popular tourist markets makes the 2023-2024 recovery period look very interesting. We expect to see new product and development opportunities.

Real Estate Investment Opportunities Are Everywhere

Thanks to CrowdStreet for providing a memorable framework when evaluating real estate investment opportunities. Who, What, and When is easy to remember.

The main criteria I focus on is evaluating the sponsor and its management team. The more experience the sponsor has, the better. Ideally, I want to invest with a sponsor who has experience navigating through prior recessions. A sponsor should have experienced at least one prior loss as well. We tend to learn much more from our losses than our wins.

I also want a sponsor to invest a reasonable amount of their own capital in the deal. For example, if a sponsor is trying to raise $2 million to purchase a $10 million property, I'd like to see 20% or more of the new capital come from the sponsor, i.e. $500K out of $2.5 million.

Like with most things, skin in the game is important. It's why I've personally invested $810,000 in 18 real estate investment opportunities since late-2016. 16 have done well or are doing well, two have not.

To attract capital, the natural tendency is to shine a spotlight on your wins. But if you have invested as long as I have, you will have plenty of losses as well. Therefore, I encourage all potential investors to ask a sponsor about their previous suboptimal investments and share what they have learned. Don’t be afraid to ask the hard questions with your hard-earned money.

Surgically Explore Real Estate Opportunities

If you'd like to explore various real estate investment opportunities on CrowdStreet, feel free to sign up here. CrowdStreet focuses on real estate opportunities in 18-hour cities where valuations are lower and cap rates are higher. The spreading out of America is a multi-decade trend. Take advantage.

Readers, what other criteria do you use to evaluate real estate opportunities? What real estate asset classes and markets are you looking most carefully at today? For more information about CrowdStreet, you can read my comprehensive CrowdStreet review.

Sign up and explore for free

CrowdStreet is a content partner of Financial Samurai. This article was written by an employee of CrowdStreet, Inc. (“CrowdStreet”) and has been prepared solely for informational purposes. CrowdStreet is not a registered broker-dealer or investment adviser. Nothing herein should be construed as an offer, recommendation, or solicitation to buy or sell any security or investment product issued by CrowdStreet or otherwise. This article is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment objectives, financial situation or needs of any investor. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance. All investors should consider such factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate.

CrowdStreet uses “partner affiliates” (e.g., bloggers and content websites) to market the CrowdStreet Marketplace. Such partner affiliates are generally compensated a fixed amount for each investor that registers on the marketplace as an accredited investor. CrowdStreet does not assume responsibility for the reliability or accuracy of any materials produced by its partner affiliates, and any information contained therein should not be used as a basis for making an investment in the CrowdStreet Marketplace, a Private Managed Account, or any product offered by CrowdStreet, Inc. or any of its affiliates.

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18 thoughts on “Evaluate Real Estate Investment Opportunities Using: Who, What, When”

  1. What do you think of investing in new homes from builders? This will be in the Florida area which they are saying values will still go up. Do you think so or it’s already gone too high? Seems like prices have almost doubled in last 6-7 years.

  2. Financial Samurai, I’d love to see a column about your real estate investments. I’m especially interested in the two that didn’t turn out so well. What have you learned? What could you have done differently in your due diligence?

    1. Sure. Besides the thoughts I’ve shared in this post, I learned that where you invest in the capital stack is important. And if you invest in equity instead of debt, you could lose plenty if you invest before a black swan even and the property is sold.

      Here’s a previous post about a property that I questioned. But it actually turned out OK in the end. https://www.financialsamurai.com/potential-real-estate-crowdfunding-loss/

      How about you? What have you learned from your losses?

      1. I second Bob J’s request for a post on your real estate investments. I have been investing in Peerstreet since 2016 and have had 4 short pay loans, 213 paid off loans, and about 75 in progress (of which about a third are late). Peerstreet is only debt and mostly single family. So then I diversified into RealtyMogul in 2019 and one of my 3 investments is underperforming because of the impacts of Covid and the Texas winter storm earlier this year. In RealtyMogul I am invested in their two REITS which earn a paltry 6% and 4.5% and 3 projects of $35k, $40k, and $75k, so the REITs are nothing to write home about and my standalone projects are too large and lumpy and long term to be considered a diversified portfolio. Then I just started investing in Fundrise about 5 months ago and I think I like it the best of the 3 platforms I have tried so far.

        I would like to know more info on how you $810k has done and your thoughts on the various platforms aside from your initial reviews.

        1. I met one of the co-founders of PeerStreet, and I didn’t get a great impression. But that could be just me.

          I’m getting quarterly updates for my investments 4-6 months behind. But when my investments are done, I can provide an update on how they did if the privacy restriction is lifted.

          Overall, I believe 4 exited successfully (hit or beat IRR targets), 8 are performing (meeting IRR targets), 5 are underperforming IRR targets (hospitality and office before COVID hit), and 1 failed (student housing, equity).

          Here’s a review I did for one successful exit and what I learned: https://www.financialsamurai.com/lessons-learned-from-a-successful-real-estate-crowdfunding-investment/

  3. Hi FS,

    What are your thoughts on the Seattle start-up – Arrived? They allow individual investors to invest in single-family rentals.


    1. I’ve been bullish on Seattle since 2002. And it has done extremely well. Are used to go up to Seattle every other month to see clients for 13 years. With so much wealth being created by Amazon, Microsoft, Starbucks, and Nike close by, the city is going to attract continuous amount of talent and capital.

      Seattle is like a SF version 2, but just with worse weather. No state taxes is hard to beat!

  4. Great article! I have about 50% of my NW tied up in real estate that I directly own and self-manage, so I avoid any private or public real estate funds because 50% seems like plenty of exposure. Everything you wrote makes sense, but in the end, the tax benefits from direct ownership of investment real estate has been very valuable to me, and as of this year, real estate has performed better than anything else for me, but that’s all due to luck in timing — starting buying real estate during the great recession, location — live and invest in a resort town that has had off the charts appreciation during COVID, and leverage — especially in the beginning.

  5. Looks interesting but to me, the best alternative to direct Real estate investment still seems to be REITs. Though definitely looking into CrowdStreet.
    Thanks for the suggestion!

    1. Public REITs are generally more tied to urban cores than 18 hour (and smaller) cities but certainly provide liquidity and an easy way to invest in RE.

    2. What we know based on history so far is that public REITs are often MORE volatile and tend to fall more when stocks decline. Therefore, buying public REITs for diversity and stability during downturns often doesn’t work.

      We saw this in March 2020. At the same time public REITs have performed tops over the past 20 years. So the key is to find the right balance.

      Check this post out: https://www.financialsamurai.com/how-does-real-estate-get-impacted-by-a-decline-in-stock-prices/

  6. Hi
    Very valuable information on what to have an eye on when it comes to real estate investing. I’d agree, real estate in general will do fine for years, but there are of course market/location specifics etc.
    I have not yet put my toe into real estate investing, so this was a really interesting read for me.
    All the best.

  7. This probably fits better in another post but hopefully is OK here as well. I’m wondering how much are you invested through tax advantaged account vs taxable?

    1. Opening up to all- does anyone have taxable funds in fundrise or is everyone sticking only to putting retirement accounts in?

  8. Thanks for sharing the investment analysis process.

    The CrowdStreet Build-To-Rent and Multifamily Fund looks interesting, as it is focused on high-growth, tax-advantages states like Texas and Florida.

  9. Why do think of investing in Real Estate when we have equal or better opportunities in stock markets?

    When I say this we have to look at both
    1) Risk 2) Liquidity 3) Return 4) Duration of investment 5) Monthly additional investment 6) maintenance 7) Leverage.

  10. Nice and easy to remember framework. I like the order as well. I definitely want to see a long and reliable track record from a sponsor before I’ll even consider a deal. Smart point on making sure a sponsor has survived through at least one major downturn as well.

    And I also like to diversify my exposure to sponsors so I don’t own deals just with one sponsor. Don’t put all your eggs in one basket as they say. It’s helped me with the where and when as well. That’s what I love about REC vs buying physical real estate.

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