The Top 4 Factors in Good Real Estate Deals

Every real estate investor has one—a deal that just worked. From start to finish. These deals, and their associated properties, can take various forms, but they all find common ground in some magic secret ingredient that makes the entire process quick, painless, and smooth like butter. And while excellent financial return certainly makes up a significant portion of that recipe, other factors like acquisition, financing, operations, construction, and more, also play a part in making a deal just downright easy. I asked some fellow investors about their best deals, and a few common characteristics topped the list.

1. Good leverage

It's no secret that great leverage makes for a great investment. And often, it’s the product of timing: An interest rate drop, for example, usually precedes a corresponding run up in asset prices – it's a pocket of time that can create some great buying opportunities due to low-priced, low-interest loan combination. Sometimes, simply sitting on an asset through a price increase, followed by a well-timed refinance, can generate incredible returns. The downside, however, is that it can be nearly impossible to price this type of timing-based investment. So while it certainly is great when it happens, basing the hope for a good deal entirely on a prediction is tantamount to timing the stock market: 99% of the time, it just doesn’t work. Still, it’s a wise strategy to be ready with available equity and/or investor capital when the moment presents itself.

2. Good location

Even a perfect price with perfect financing can’t bail you out of a bad town. What makes a location “good” is worthy of an entirely separate article, but these elements are critical:

A growing population. There’s no ideal number here, and context matters. Larger population areas with a small growth percentage, for example, aren’t intrinsically growing slower than a smaller area with a high percentage. Growth is transient based on a number of factors, so it’s essential to look at 5, 10, and even 20-year growth trends to determine the stability and health of any area. Major industries experiencing growth are also great indicators of future growth, even if the actual population statistics haven’t yet reflected it.

Jobs, jobs, jobs. In manufactured housing parks (as well as other types of multifamily housing developments) we are in the business of affordable housing, so an area that has more jobs to support that housing is a virtual guarantee of sustained growth in a region. High job growth is also something that can outweigh more standard real estate analytical tools like current population, average income, and current rent, because it brings working-age people and their families to areas where they usually require new housing units.

Because of this, it’s important to look at not only whether a population is growing, but how it’s growing. Portland, Oregon, is a great cautionary tale here because it’s notorious for experiencing population growth yet sustains higher-than-average vacancy for a city of its size, as well as slow rental growth. One reason for this could be the type of people who are moving to the area: by and large, they are young people who are seeking a lifestyle rather than relocating for a job. Without adequate wages to support independent housing, Portland finds itself with a higher tenant load per unit as these younger residents are perfectly happy to share accommodations with multiple roommates in order to enjoy a desired lifestyle location.        

Off the beaten path. This doesn’t have to mean finding a park in a tiny town that’s 100 miles from the closest big city, although sometimes it can mean exactly that. This geographic trait has more to do with an in-depth understanding of an area that facilitates “non-public” knowledge. Some examples can include

• Flood plains: Not all flood plains are created equal, and often-outdated FEMA maps may require a property to be formally listed as a “flood zone,” even when the chance of flooding is functionally reduced to zero. River-based flood plains also change much faster than federal maps can update due to frequent river path changes, dam modifications and relocations, and other climactic conditions.
• Areas not interstate-adjacent: Many areas with large populations and great job growth are simply off the radar of large operators, who tend to stick to areas with major transit. Losing the big institutional buyer, however, can create great opportunities for smaller operators.
• “Small” towns: There is definitely such a thing as too small (under 10,000 people gets difficult to manage), but most larger operators restrict acquisitions to areas with an MSA of 250,000+. Like off-interstate areas, this leaves a huge swath of areas with great properties to explore.

3. Revenue and cost opportunities

Great investments also come with multiple ways to add value, because raising rent alone isn’t usually a sustainable business model. Markets change, new units get built, and ever-increasing government regulations make increasing revenue a more difficult proposition than it may seem. That said, most great property deals do involve submarket rents that allow for sustained revenue growth that doesn’t require outpricing the market or overly large annual rent increases.

In addition to reasonable revenue increase opportunities, the ability to make strategic improvements to reduce costs is almost always part of a great buy. Things like utility repairs to reduce leaks and volume, adding meters to increase tenant responsibility for usage, and investing in trash compactors are all fantastic capital improvements that show an immediate return on investment. Other improvements like playgrounds, locking mailboxes, street improvements, and upgraded community areas also show a similar, though less quantifiable, ROI in the form of happy tenants, who see active investment into their communities and are thus more likely to invest in their own home and lot (and be more amenable to rent increases.)

4. Unique knowledge

In almost every great deal, the buyer knew something the market didn’t -- knowledge of a smaller community that was off the radar of other operators, for instance, or abandoned spaces in a park that could be easily recovered to increase density, or even a cost-effective means of conducting a repair that others thought would be cost prohibitive. Taking the time to deeply research a market, understand a property, and gain expertise in the various capital improvement processes and technology is absolutely critical to making great deals. This factor is also the one that investors as individuals can have the most control and influence over, so it’s a smart strategy to make yourself an expert in a geography, product type, and operational methodology.