The last few weeks, after closing on our 158-unit investment in Savannah, GA have been quite busy – not only with transitioning the property, but also with continuously networking with various operators with the goal of curating the next investment opportunity.

Unless you are part of our Dream Believe Achieve Investment Club or unless the investment is 506C (i.e. reserved for accredited investors only), you will likely not hear about our investment offerings. If you’d like to get access to our investment offerings, connect with us.

We look to curate one to four investments a year. There may be long periods of silence where you do not hear about investment opportunities from us. However, we are not sitting idle.

In the past few weeks we were presented with several investment offerings and passed for a variety of reasons, including:

• Presence of a preferred equity partner. Preferred equity partners bring a sizeable (multi-million dollar) check to the closing table and in return have preferential terms, including sitting ahead of the passive investors in the equity stack. While this is not a negative factor in and of itself, for now we are not pursuing deals with pref equity partners as such check usually comes with strings attached such as ability to take over the deal, trigger voting rights or even a sale of the property at terms that may not be beneficial to the limited partners.
• Insufficient reserves. Cash and cash flow are key to managing risk and surviving in a down market (which we have entered). As such, we usually like to have ample reserves upfront (ideally operating reserves of six months of operating expenses AND debt service; capex reserves with at least a 10% cost overrun buffer). Unexpected events can always happen and having sufficient reserves can help weather a storm or a period of compressed cash flow in the short run.
• Unfavorable capital call structure. Just like no one gets married with the idea of getting divorced, we do not enter into a deal with the expectations of making a capital call. However, we usually plan for the downside. Thus, in the worst case scenario, if a capital call was to occur, we’d like to have the option to not participate. The typical penalty for not participating is dilution of ownership share, should other investors step in instead. However, in the particular deals we reviewed non-participating investors (known as defaulting members) were also assessed a penalty (equivalent to interest) accruing on their principal investment amount.
• Negative leverage. The cost of debt (interest rate on the loan, albeit fixed) was above the purchase price cap rate. This is usually an indicator of negative cash flow, which was the case for those couple of deals. We like to start with cash flow on day 1.
• The submarket. On one opportunity to submarket did no meet our criteria based on median household income and crime activity.
• Unusual underwriting assumptions pertaining to no stabilization period for a value add deal, aggressive rent growth (too high), aggressive expenses (too low), aggressive (low) exit cap rates.

As we approach 2024, we would look to expand out market footprint as long as market and submarket meets our criteria. 

We still like the Florida market a lot. However, over the last 18 months or so deals have been tough to pencil out due to sellers still having unrealistic price expectations coupled with uncertainty around insurance (as well as other increase in expenses), which have resulted in cash flow compression. Hence why the last two syndications we closed were in GA (we also like secondary and tertiary markets like Augusta and Savannah).

As we continue to evaluate investment opportunities, we will continue to prioritize the operator ahead of the deal. We look for track record, a history of at least a couple of exits, vertically integrated operations (or at least a history of working with the same property manager over an extended period of time over multiple properties), transparent communication with monthly reporting, and preferably monthly (vs. quarterly) distributions.

We will also stay the course and continue to adhere to our underwriting fundamental principals. 

Adhering to investment fundamentals has not yet failed us, so we plan to stay the course especially as we enter into frothy waters, which inevitably will also bring exciting investment opportunities that we will share with members of our Dream Believe Achieve Investment Club.

We are excited about 2024 and what is in store and look forward to our collective growth and helping you secure your financial freedom one step (investment) at a time!

Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to info@dbacapitalgroup.com.

Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.