Updated September 29, 2022.
When we’re talking cash flow, equity, and appreciation, it doesn’t get much better than real estate. However, whether you’re investing in a multifamily real estate deal or a two-bedroom flat-to-house hack, the fundamentals of research and reviewing an opportunity are paramount to offset risk.
One of the critical ways a fund or an investor can assess the value of an investment is by using what’s known as an investment box. However, it’s not the type of box your Amazon purchase might arrive in. Instead, it’s a tool to examine investment opportunities by defining critical investment criteria and categories.
This blog will look at the components you’ll typically find in a real estate investment box, how we’ve established the Viking Capital buy box, and why it works so well.
What Does “Investment Box” Mean for Multifamily Real Estate?
An investment box for multifamily properties (or an investment box in general) is a visual (or symbolic) representation of the criteria used by investors or fund managers to determine whether an asset is a worthy investment or not. It may look like a grid, and it is also used to represent the investment style of other investment-based companies, for example, a hedge fund.
An investment box’s criteria will differ depending on the investment strategy of the real estate fund or investment firm. It’s also influenced by factors such as the type of investment or risk level of the fund.
In multifamily property investing, knowing which properties not to invest in is just as important as knowing which to invest in. Therefore, assets that don’t fit the criteria—or that don’t fit in the “box”—are not considered once the box has been defined. An investment box also functions as a transparency tool by giving potential investors insight into the rationale behind the fund’s moves.
Finally, it’s a great way to ensure everyone is on the same page.
What’s Inside a Multifamily Real Estate Investing Box?
With multifamily real estate, funds or asset managers set their ‘box’ based on three critical criteria. So, what’s in the box?
1. The Markets for Potential Property Investments
Location is one of the most important considerations when purchasing real estate properties.
Buying in a “good” location may seem logical for each investment box. However, some investment strategies might involve purchasing property in up-and-coming areas with a good trajectory for growth to add more potential future value for investors.
In addition, demographics and the concepts of what a “good” neighborhood is are constantly shifting. This is why it’s essential to have the property locations and markets clearly defined and backed by deep location-specific research when setting the criteria for an investment box.
When considering location, real estate funds may assess the neighborhood, school quality, access to amenities, proximity to a major city, and even the general appearance of an area. Asset managers also consider the general state of the real estate market in that area, looking for rent growth opportunities that can make a multifamily investment more profitable for investors long term.
Property location is also closely tied to property class which is assessed below.
2. The Age of the Property
The age of the property refers to the construction date. A common way for an investment real estate company to set age parameters in their investment box is to select a date before which a property will not be considered for purchase. For example, a management group may not consider properties constructed before 1980 in their box.
Why is age important? Factors such as the need for renovation, access to modern amenities, attractiveness for renters, and the costs for capital improvements can impact the purchase price of the property and the projections. If a property is too old to fit the investment box criteria, it can be a bad investment that never pays off for an asset’s investors.
Contrarily, an investment box may set parameters for older property purchases that are cheaper to purchase and can be renovated to sell at a profit.
3. The Property Class
The property class refers to a ranking system real estate professionals use to assess property based on several characteristics, including those listed above. It is based on the model of return vs. risk and follows a logical and sequential order.
Property class is easily defined in an investment box as the property types are listed alphabetically from A to D. Properties in class ‘A’ are often newly constructed with high-level amenities in an excellent location. In contrast, a class ‘D’ property will require repairs, may not be centrally located, and could be in a neighborhood with a higher crime rate.
What is Viking Capital Investment’s Box?
You might be wondering what an investment box looks like in practice. So we’ll share with you the criteria we use to manage the Viking Capital investment box for those wanting to invest in multifamily real estate.
- Location: Regarding location, we focus on sunbelt properties such as Texas, North Carolina, and Florida. Within these areas, our fund centers on major metropolitan areas within these zones. We also consider second-tier, tertiary markets that are experiencing high growth. This indicates that they will become major urban areas in the next decade. The sunbelt shows excellent demographics, population growth, and healthy economies.
- The property’s age: We generally don’t consider properties built before 1985, but we also consider multifamily assets through development and new construction.
- The property class: Within our investment box, we look for Class B assets in Class A areas or Class A assets in Class A and B areas, offering a lower-risk option to potential investors.
Sticking to our investment criteria means we find and deliver a phenomenal experience for our real estate investors with every asset we choose!
What Does This Mean for Our Investors?
Due to the combination of criteria within our investment box, we can offer a low-risk investment opportunity to accredited investors looking to make money through multifamily investing.
Through the diversification of our asset classes, we invest in different geographical locations, property ages, and well-established areas showing solid signs of growth. Thanks to our investment box, we can mitigate risk to protect our investors through capital preservation.
Ready To Learn More About Multifamily Real Estate Investment?
Now that you know how real estate investment asset managers determine criteria for acquiring assets, you’re one step closer to securing your financial future through a multifamily real estate fund. If you’d like to learn more about how Viking Capital can help you get started on your multifamily real estate journey, reach out today.
Or, if you’re ready to start our qualification process, go ahead and join the Viking Capital investors club (it’s completely free).