Talk to an Advisor

5 Key Factors to Evaluate Before Investing in a Multifamily DST

Published on: February 5, 2024

In today’s real estate landscape, where property values and interest rates are on the rise, achieving a profitable return on investment can be a formidable challenge. Whether you’re considering a direct property investment or exploring fractional ownership structures like a Delaware Statutory Trust (DST), it’s crucial to look beyond the broader economic factors that influence the market. While 89% of investors allocate their funds to real estate investments, many overlook the critical aspects that go beyond the macroeconomic pressures.

From the property’s location to the financial stability of its tenants, assessing the viability of a real estate investment involves more than just comparing cash-on-cash returns among potential options, as these numbers may not provide the full picture. To offer valuable insights into the considerations that matter, we’ve compiled a list of five essential factors that every investor should thoroughly evaluate before committing to a multifamily DST investment.

Renter Appeal and Visibility

The foundation of a successful real estate investment lies in demand. If there’s no demand for the property you’re eyeing, your investment could be doomed from the start. Boosting tenant appeal and retention begins with establishing a competitive advantage. Does the property offer superior amenities compared to neighboring developments? Is the rental pricing competitive in the market? Effective marketing and branding strategies can also enhance the chances of attracting potential tenants. Investigating the property manager’s track record and portfolio can provide insights into the operational aspects, such as tenant retention rates. Securing long-term, reliable tenants can lower turnover and lead to consistent occupancy rates and higher revenue.

  1. Renter Appeal:
    • Understanding Demand: Recognizing that every successful real estate investment begins with demand is crucial. The demand for rental properties can be influenced by various factors, including population growth, job opportunities in the area, and lifestyle preferences. Investigate the local market to understand the current demand for multifamily housing. Are there factors such as a growing population or a shortage of housing that indicate a strong demand for rental units?
    • Competitive Advantage: Creating a competitive advantage for your property is essential to attract and retain tenants. This involves offering amenities and features that set your property apart from others in the area. Consider factors like modern appliances, attractive landscaping, fitness centers, communal spaces, or pet-friendly policies. Conduct a competitive analysis of neighboring properties to identify gaps you can fill.
    • Pricing Strategy: Rental pricing is a critical element of renter appeal. Ensure that your rental rates are competitive within the local market. An overpriced property may struggle to attract tenants, while underpricing may impact your return on investment. Balance affordability with the value your property offers.
    • Effective Marketing: Successful marketing strategies can significantly impact tenant attraction and retention. Invest in professional photography, virtual tours, and well-crafted property listings. Utilize online platforms and social media to reach potential renters. Consistent and effective marketing efforts can increase the visibility of your property among prospective tenants.
  2. Visibility:
    • Effective Branding: The way your property is branded can influence its visibility and appeal. Consider creating a unique and memorable brand for your multifamily property. This includes developing a compelling name, logo, and visual identity that resonates with your target audience. A strong brand can make your property more recognizable and appealing.
    • Online Presence: In today’s digital age, an online presence is essential. Ensure that your property has a professional website that provides comprehensive information for prospective tenants. Online listings on popular real estate websites should be regularly updated with high-quality photos and accurate details. Encourage positive online reviews and respond to inquiries promptly to enhance your property’s online reputation.
    • Property Management: The reputation and track record of the property management team can significantly affect visibility. Tenants often look for well-managed properties that provide a hassle-free renting experience. Investigate the property manager’s history and reviews of their services to ensure they are capable of maintaining a positive image for your investment.
    • Tenant Retention: While attracting new tenants is essential, retaining existing tenants is equally important for long-term success. Happy and satisfied tenants are more likely to renew their leases, reducing turnover costs and maintaining consistent occupancy rates. Providing excellent customer service, responding promptly to maintenance requests, and creating a sense of community within the property can contribute to high tenant retention.

The Renter Appeal and Visibility aspect of real estate investment involves understanding the demand for rental properties, creating a competitive advantage through amenities and pricing, and effectively marketing the property to prospective tenants. Visibility is enhanced through branding, a strong online presence, reputable property management, and a focus on tenant satisfaction and retention. By addressing these elements, investors can increase the chances of a successful and profitable multifamily DST investment.

Financial Statement Strength

When assessing a potential investment, always request historical and projected financial statements, if available. Scrutinize past expenses to ensure they align with market norms. Examine future projections, especially regarding rental growth, and cross-reference them with data from reputable real estate sources like Reis or Axiometrics. While a property may promise a projected 7% cash-on-cash return, these numbers must be substantiated by credible data sources. In cases where the property lacks professional management and financial data, seek expert opinions to obtain a reliable valuation of income and expenses.

  1. Historical Financials:
    • Past Performance: Historical financial statements provide a window into the property’s financial performance over time. By analyzing past income and expense data, you can assess how the property has performed in different market conditions and identify trends.
    • Expense Analysis: Scrutinize past expenses to ensure they align with industry norms and expectations. Look for any irregularities or significant fluctuations that may indicate issues with property management or maintenance. Understanding the historical cost structure can help you project future expenses more accurately.
    • Income Stability: Consistency in rental income is a positive indicator. A property with stable and predictable rental income is generally considered less risky. Evaluate whether the property has a history of steady cash flow or if it has experienced significant income fluctuations.
  2. Projected Financials:
    • Rental Growth: Assess the projections for rental income growth. Examine whether these projections are reasonable and in line with market conditions. Compare these forecasts with data from respected real estate sources to ensure they are achievable.
    • Expense Projections: Review the projected expenses for the property, including maintenance, property management fees, property taxes, and insurance costs. Ensure that these projections are realistic and in line with industry standards.
    • Cash Flow Analysis: Calculate the projected cash flow to assess whether it meets your investment goals. Ensure that the property’s projected cash-on-cash return is sustainable and competitive within the market.
  3. Data Sources and Validation:
    • Independent Data Sources: When evaluating financial statements, rely on credible and independent sources of data such as Reis, Axiometrics, or other respected real estate research providers. These sources can offer insights into market trends, rental rates, and other key metrics to validate the property’s financial projections.
    • Third-party Expert Opinions: In cases where historical or projected financials are not readily available, consider seeking opinions from real estate experts or appraisers. They can help you assess the credibility of the income and expense sources and provide a reliable valuation.
  4. Risk Assessment:
    • Debt Obligations: Understand the property’s existing debt obligations, including mortgages or loans. Analyze the terms of these obligations, such as interest rates, maturity dates, and amortization schedules, to gauge the impact on cash flow and overall financial stability.
    • Market Factors: Consider how external market factors, such as changes in interest rates or economic conditions, may affect the property’s financial performance. Evaluate the property’s sensitivity to these external variables and have contingency plans in place.
    • Contingency Funds: In addition to analyzing financial statements, assess whether the property has adequate capital reserves or contingency funds to address unexpected expenses or income disruptions. Ensuring that the property is sufficiently capitalized can mitigate financial risks.
  5. Due Diligence:
    • Thorough Review: Conduct a comprehensive due diligence process that includes a thorough examination of all financial documents, including tax returns, rent rolls, profit and loss statements, and balance sheets. Engage legal and financial experts if necessary to ensure the accuracy and completeness of the financial information.
    • Verification: Verify the accuracy of financial statements by cross-referencing them with other relevant documents and data sources. Confirm that the numbers presented in the statements align with the property’s actual performance.

Assessing the financial statement strength of a multifamily DST investment involves analyzing historical and projected financials, validating data from reliable sources, understanding the property’s risk factors, and conducting thorough due diligence. A careful examination of financial statements and related information is essential for making informed investment decisions and ensuring the long-term financial viability of the property.

Maintenance Costs

Real estate is a tangible asset with physical requirements that demand ongoing maintenance and upkeep. Before entering a fractional interest agreement in a DST, consider inspecting the property or having a trusted expert do so. Identify immediate and future maintenance needs, typically outlined in the property condition report or appraisal. Ensuring that the property is adequately capitalized is crucial to avoid depletion of capital reserves, especially in a Delaware Statutory Trust where additional contributions by owners are not permitted. Third-party reports like appraisals and property condition assessments can provide valuable insights into the property’s current condition and capital needs.

  1. Physical Inspection:
    • Property Condition Report: A property condition report is a valuable resource that provides an overview of the property’s physical condition. It typically outlines immediate maintenance needs and identifies items that may require replacement or repair in the future. This report should be reviewed thoroughly to understand the property’s current state.
    • Professional Inspection: Whenever possible, conduct a professional inspection of the property. Hiring a qualified inspector can uncover hidden issues, structural concerns, or potential maintenance challenges that may not be evident in a visual inspection alone. This step is crucial to identify any major repairs or safety concerns.
  2. Capital Reserves:
    • Sufficient Capitalization: Ensure that the property has sufficient capital reserves to cover both immediate and long-term maintenance costs. In a multifamily DST, it’s essential to have reserves set aside because there may be restrictions on additional contributions by beneficial owners. A well-capitalized property is better prepared to handle unexpected repairs and replacements without compromising cash flow.
    • Reserve Studies: Some properties may have conducted reserve studies, which assess the expected lifespan of major components (e.g., roofs, HVAC systems) and estimate the future replacement costs. Review these studies to understand the anticipated capital needs over time.
  3. Operational Expenses:
    • Budget Review: Analyze the property’s budget to gain insights into ongoing operational expenses related to maintenance. Review items such as routine repairs, landscaping, utilities, and property management fees. Verify that the budget is reasonable and aligns with industry standards.
    • Vendor Contracts: Assess the contracts with maintenance vendors and service providers. Understanding the terms and costs associated with these contracts can help anticipate future expenses. Ensure that these contracts are competitive and provide value for the services rendered.
  4. Long-term Planning:
    • Replacement Schedules: Develop or review replacement schedules for major components and systems within the property. This schedule should outline when key items, such as the roof, plumbing, or HVAC systems, are expected to reach the end of their useful life and need replacement.
    • Capital Expenditure Forecast: Create a capital expenditure forecast that outlines the anticipated costs of major maintenance and replacement projects over the property’s holding period. This forecast should be integrated into your overall investment strategy and financial planning.
  5. Risk Mitigation:
    • Insurance Coverage: Ensure that the property has adequate insurance coverage to mitigate the financial impact of unexpected events, such as natural disasters or accidents. Review the policy terms and deductibles to understand the level of protection in place.
    • Emergency Fund: Consider establishing an emergency fund specifically designated for unforeseen maintenance emergencies. Having a reserve fund separate from operational expenses can provide peace of mind and financial stability during crisis situations.
  6. Professional Guidance:
    • Consult Experts: When in doubt, seek advice from professionals experienced in property maintenance and management. Engaging property managers, contractors, and maintenance experts can provide valuable insights into the property’s condition and potential maintenance challenges.
    • Legal and Financial Experts: Depending on the complexity of the investment and the DST structure, consult with legal and financial experts who specialize in real estate to ensure that the property’s maintenance plans align with your investment goals and legal obligations.

Evaluating maintenance costs in a multifamily DST investment involves conducting thorough inspections, assessing capital reserves, reviewing operational expenses, planning for long-term maintenance needs, and implementing risk mitigation strategies. Ensuring that the property is well-maintained and adequately prepared for maintenance expenses is essential for preserving its long-term value and financial stability.

Rent Roll

A property’s rent roll offers valuable insights into its historical performance. It provides detailed information about tenants and leases, particularly in multifamily properties, allowing you to analyze vacancy trends and identify areas that could drive rent growth, such as underutilized parking spaces. Discrepancies in the rent roll may indicate poor prior management and help you avoid high-risk investments. Moreover, rent rolls serve as a basis for income evaluations commonly used by brokers and appraisers.

  1. Understanding Rent Roll:
    • Definition: A rent roll is a document that provides a comprehensive overview of the rental income generated by a property. It details the rental agreements for each unit within the property, including information about tenants, lease terms, rental rates, and additional income sources (e.g., parking fees or utility reimbursements).
  2. Analyzing Rent Roll:
    • Vacancy Trends: Examine the rent roll to identify vacancy trends. Analyzing historical data can reveal patterns in tenant turnover, helping you understand whether the property has experienced high or low vacancy rates over time.
    • Lease Terms: Review lease terms to assess the stability of rental income. Longer lease terms provide more predictable income streams and reduce turnover-related expenses. Evaluate the average lease duration and whether there are any significant lease expirations in the near future.
    • Rent Levels: Evaluate current rental rates and compare them to market averages. Are the property’s rental rates competitive within the local market? Consider whether there is room for rental rate increases, and assess the potential impact on cash flow.
    • Additional Income Streams: Identify any additional income sources listed in the rent roll, such as fees for parking spaces, laundry facilities, or late payment penalties. These sources can contribute to the property’s overall revenue.
    • Tenant Demographics: Gain insights into tenant demographics, such as the mix of residential, commercial, or retail tenants, if applicable. Understanding the tenant composition can help you assess the diversification of income sources and potential risks.
    • Lease Exclusions: Check for any lease exclusions or special terms that may affect rental income. Some leases may include rent concessions, tenant improvement allowances, or other incentives that can impact cash flow.
  3. Lease Validation:
    • Confirm Lease Details: Validate the lease information on the rent roll by cross-referencing it with lease agreements and tenant records. Ensure that the terms, rental rates, and lease start and end dates match the documentation.
    • Tenant Communication: Consider communicating with tenants directly, especially in the case of long-term or significant lease agreements. Confirm their intentions regarding lease renewals and gather feedback on their rental experience.
  4. Identifying Red Flags:
    • Inconsistent Data: Look for inconsistencies or discrepancies in the rent roll data. Discrepancies may indicate errors or inaccuracies that require further investigation.
    • High Turnover: A rent roll with a history of high turnover may signal management or property issues that need to be addressed.
    • Overly Optimistic Projections: Be cautious if the rent roll presents overly optimistic projections, such as aggressive rent growth assumptions. Verify that these projections are supported by market data and reasonable expectations.
  5. Property Management Review:
    • Property Management Quality: Assess the quality of property management based on the rent roll data. Consistent rent collection, low vacancy rates, and stable tenant relationships can indicate effective management.
    • Management Transition: If there has been a recent change in property management, investigate the reasons behind the transition and assess its potential impact on tenant relations and income stability.
  6. Impact on Investment Decision:
    • Risk Assessment: The rent roll is a critical tool for assessing the financial stability and performance of the property. It helps investors evaluate the level of risk associated with rental income and occupancy rates.
    • Cash Flow Analysis: The information from the rent roll is essential for conducting cash flow analysis, which is crucial in determining the property’s potential return on investment (ROI).
    • Negotiation and Strategy: Armed with a thorough understanding of the rent roll, investors can make informed decisions regarding rental rate adjustments, lease renewals, and overall property management strategies.

The rent roll is a fundamental document for evaluating the income-generating potential and financial stability of a property within a multifamily DST investment. Analyzing the rent roll involves assessing vacancy trends, lease terms, rental rates, additional income sources, tenant demographics, and potential red flags. Validating the lease details, understanding property management quality, and using this information to inform investment decisions are essential steps in the due diligence process.

The Property’s Story

Every investment property has a unique history that can offer valuable context. From the property’s location within the submarket to the motivations of its previous owner, understanding this backstory can provide insights beyond standard due diligence. Questions like “Who was the previous owner, and why did they sell the property?” should be explored. While past performance does not guarantee future returns, knowledge of the property’s history can help you identify potential strengths and weaknesses.

  1. Historical Context:
    • Prior Ownership: Investigating the history of property ownership can provide valuable insights into the property’s story. Knowing who the previous owners were and why they sold the property can shed light on any issues or opportunities associated with the property.
    • Market Trends: Consider how the property’s performance has aligned with broader market trends over time. Understanding how it fared during different economic cycles or real estate market fluctuations can provide context for its historical performance.
  2. Property-Specific Factors:
    • Improvements and Renovations: Determine if there have been any significant improvements or renovations made to the property. Upgrades or renovations can enhance the property’s appeal, increase its value, and attract tenants.
    • Operating History: Review the property’s historical operating data, including rental income, expenses, and occupancy rates. Look for patterns or anomalies that may impact future performance.
    • Environmental Considerations: Investigate any environmental factors or concerns associated with the property’s history. For instance, past contamination issues or environmental regulations can affect its long-term value and operation.
  3. Tenant and Lease History:
    • Tenant Relationships: Understanding the property’s tenant history can reveal valuable insights. Analyze tenant relationships and their impact on occupancy rates and rent collection. Were there long-standing, reliable tenants, or a history of frequent tenant turnover?
    • Lease Negotiations: Evaluate how lease negotiations have been conducted in the past. Were there rent concessions, incentives, or challenges in securing leases? This information can help you anticipate future lease negotiations and tenant relations.
  4. Market Positioning:
    • Submarket Dynamics: Assess the property’s positioning within its submarket. Understand the submarket’s growth potential, demographics, and demand drivers. Consider how the property’s location and characteristics align with current market dynamics.
    • Competitive Landscape: Examine the competitive landscape surrounding the property. How does it compare to neighboring properties in terms of amenities, pricing, and market positioning? Identifying competitive advantages or disadvantages can inform your investment strategy.
  5. Future Outlook:
    • Market Projections: Consider future market projections and how they align with the property’s story. Are there anticipated changes in the submarket that may impact property values or rental demand? Understanding the potential trajectory of the market can help you make informed investment decisions.
    • Property-Specific Plans: If there are plans for future improvements, expansions, or changes to the property, assess how these plans align with your investment objectives. Such plans can significantly impact the property’s future value and performance.
  6. Risk Assessment:
    • Strengths and Weaknesses: Based on the property’s historical narrative, identify its strengths and weaknesses. Recognize the factors that have contributed to its success or challenges in the past.
    • Risk Mitigation: Use the property’s story to develop risk mitigation strategies. Address potential issues or vulnerabilities identified in the property’s history to minimize risks and optimize returns.
  7. Legal and Regulatory Considerations:
    • Compliance and Legal Issues: Investigate whether the property has a history of compliance with local zoning regulations, building codes, and other legal requirements. Past legal issues or disputes can impact the property’s story and its future operation.
  8. Community Impact:
    • Community Engagement: Assess the property’s relationship with the local community. Positive community engagement can enhance the property’s reputation and tenant relations. Negative interactions or conflicts with the community may pose challenges.

Understanding “The Property’s Story” involves delving into the historical context, property-specific factors, tenant and lease history, market positioning, future outlook, risk assessment, legal considerations, and community impact. This comprehensive analysis helps investors make informed decisions, anticipate potential challenges, and develop strategies to maximize the value and performance of the property within a multifamily DST investment.

These five considerations are essential steps before making any investment in real estate, whether direct or indirect. Given the substantial capital required for real estate investments today, neglecting these factors could lead to unfavorable outcomes in your multifamily property investment.

Ready to make your next multifamily DST investment a success? Take these crucial steps to evaluate every aspect of your potential property and ensure a profitable venture. Don’t miss out on the opportunity to secure your financial future in real estate. Start your journey now and turn these insights into action. Invest wisely, and watch your real estate portfolio thrive!


Authored By:

1031 Investment Advisor

Nate oversees the daily operations, business development, and strategy for 1031 Exchange Place. He became interested in real estate from a young age due to his father's influence. After earning his real estate license at 18, Nate worked in the 1031 industry, focusing on business development through a unique white-labeling model. Following a religious mission in Taiwan, he continued in the industry until the 2008/2009 real estate crash. During the downturn, Nate pursued entrepreneurship and marketing, working with startups and outdoor companies. As the 1031 market recovered, he returned to work with his father, aiming to provide a more personalized experience for clients. Nate is passionate about outdoor activities and spends his free time with his wife and four sons, enjoying fly fishing, skiing, backpacking, rock climbing, and riding dirt bikes.