How to Identify a Good Operator

When investing in a multifamily syndication, choosing a good operator is critical to the success of the investment. The operator is responsible for the initial assessment and underwriting of the asset, managing the property, making key decisions, and executing the business plan to maximize returns for investors.

To put it bluntly, a bad operator can mistakenly sign up for a bad deal or even kill a good deal. While this business is simple, there are many opportunities for an inexperienced operator to go wrong. This begins at the initial evaluation of the asset, through managing over the hold period and ultimately the sale. To ensure your money is in good hands, here are a few key factors to consider when evaluation a potential operator:

1. Experience and Expertise – the operator should have experience and expertise in all aspects of multifamily investing. The beauty of syndications is that one person is not responsible for expertise in all of these areas; however, you must ensure that the team as a whole covers all basis, from initial analysis (underwriting), evaluation and inspections, property management, and so on.

2. Track Record – Does the team have a proven track record of past success in the multifamily space? This can be demonstrated through past performance on similar investments, such as successfully identifying and acquiring properties, managing the assets, and generating strong returns for investors. Problems do arise during closing of the property or management over the hold period, an experience team with a strong track record has overcome these issues in the past and will use those experiences to mitigate risk moving forward. Once could even argue that a team with a good track record could better identify the issues that could become opportunities.

3. Property Management – Quality property management is one of the largest factors that will make or beak an investment. Does this operator have a plan to effectively manage multifamily properties, with a focus on maintaining high occupancy rates, managing expenses, and providing exceptional tenant services? Tenant turnover is one of the largest expenses in real estate, what is the plan to keep this low? Look for an operator who has a clear strategy for managing the property, including leasing, marketing, and maintenance plans. Additionally, consider the operator's tenant screening process to ensure that they are attracting high-quality tenants who will be reliable in paying rent and maintaining the property.

4. Market Knowledge – The operator should have a deep understanding of the local market and submarket where the investment property is located. They should be able to identify emerging trends, market conditions, and opportunities that will impact the investment.

5. Investment strategy – It is important to evaluate the operator's investment strategy to ensure that it aligns with your own investment goals and risk tolerance. Look for an operator who has a clear investment thesis and a proven track record of executing successful investments.

6. Alignment of Interest – Look for an operator who has a strong alignment of interests with investors. This can be demonstrated through a structure that incentivizes the operator to perform well, such as a profit-sharing arrangement. Additionally, does the operator have "skin in the game," meaning they have a financial stake in the investment and are aligned with the interests of the investors. This can also help to ensure that the operator is motivated to maximize returns for investors.

7. Risk Management – A good operator should be able to identify and mitigate risks associated with the investment. This includes a thorough underwriting process, consideration of potential risks such as market volatility, unforeseen events such as natural disasters or tenant turnover, and a plan to manage these risks effectively.

8. Due Diligence – Before investing with an operator, conduct thorough due diligence on the operator and their past performance. This may include reviewing their financial statements, reviewing past investment offerings and investor communications, and speaking with past investors to get a sense of their experience.

9. Communication – Good communication is key to a successful multifamily syndication. Look for an operator who is transparent and responsive in their communications with investors, providing regular updates on the property's performance and any changes to the business plan.

10. Reputation - Look for an operator with a strong reputation in the industry, including positive reviews from past investors, positive references, and a good standing with regulatory bodies and industry organizations. Word travels fast in this industry, whether it be good or bad. Ask around.

Outside of all of the technical and measurable items, what is your “gut” or intuition telling you? How does this person treat people? Not only are the operators responsible for executing the business plan, but they are responsible for creating and keeping the culture and community at the apartment complex. The staff should be friendly and know the names of the residents. At the end of the day there are two types of operators – Those who will walk past the piece of trash on the ground because it’s not their job, and those who lead by example and stop to pick it up. A good operator will do all means necessary to provide a safe and quality home for their tenants and provide returns for their investors.

If you have more questions on evaluating operators and investing passively in multifamily real estate, please visit www.westalleycapital.com