The second phase of the DiversyFund Growth REIT is the acquisition phase, which is just as critical as the first phase, capital raise, outlined in our previous blog post. Acquisition helps REITs achieve growth through the purchase of properties to expand their portfolios. Each asset purchased during acquisition will provide a source of future cash flow for the trust. For DiversyFund, this means researching, vetting, and purchasing multifamily residential properties with favorable ROI (return on investment) potential. Understanding the acquisition phase, and all of the steps it entails, can help you determine if investing in a residential REIT makes sense for your long-term wealth strategy.
Before physically acquiring a property, REITs like DiversyFund go through an extensive research process. This means investigating not only the properties themselves, but the communities where they are located. The ideal acquisition involves a multifamily property, such as an apartment building or apartment complex, with potential for cash flow in a community with possibilities for future growth. DiversyFund typically looks at potential properties in the following types of markets:
Secondary Markets: areas outside of major city centers with a population of 1 million or more and opportunity for population expansion and real estate investment. Phoenix and Tuscon, Arizona, are two examples of bustling secondary markets.
TertiaryEmerging Markets: emerging markets with a population of less than 1 million and significant opportunities for development and investment. Examples of tertiary markets include Huntsville, Alabama, and Knoxville, Tennessee.
Research in the acquisition phase may consist of looking for areas with a recent history of population growth, such as those welcoming remote workers with a more affordable cost of living and more plentiful housing options. DiversyFund searches across the country to identify the most favorable markets, whether they are located in collar counties near a burgeoning metro center or a smaller city with a recent history of population and job growth.
Secondary and tertiary markets can be looked upon more favorably than gateway communities, in part due to their typically lower real estate costs and lower overall cost of living. These conditions often make communities more desirable for renters, making them prime options for REITs. Some markets DiversyFund has already researched and invested in include Texas and Florida, where already acquired properties in these unique and desirable areas are providing steady cash flow through increased rents.
As DiversyFund completes the research process, it will begin vetting properties to make the best possible acquisition for its portfolio and investment. The properties are looked at for their individual growth potential, as well as the growth potential of the communities they are located in. For example, a multifamily apartment building located in an up-and-coming city near an area slated for new retail construction and new school facilities can show the potential for both increased rental income and higher occupancy rates.
Vetting also includes weighing the cost of necessary repairs and targeted value-add strategies with the property’s ability to provide a return on the REIT’s investment. The most important thing to remember with vetting is that any property the REIT chooses to purchase must be able to produce cash flow for the trust. Properties that can’t provide consistent cash flow or those with limited opportunities for growth can damage a portfolio, so it’s important that the vetting process be thorough and thoughtful for every acquisition.
Acquisition or Purchase
Once the research and vetting are complete, properties can then be purchased. This is done primarily through the use of funds collected during the capital raise phase. The REIT may continue to raise some capital during the beginning of acquisition – if the REIT has not closed to investments – meaning the capital raise phase and acquisition phase often run concurrently. The properties purchased by the DiversyFund Growth REIT typically feature 100 or more units, some percentage of which will be already occupied by current residents. As the purchase is completed for each asset, DiversyFund assumes management to ensure a smooth transition for those residents while providing essential services and identifying potential opportunities for improving the facilities.
The purchase or acquisition of assets by a REIT provides investors an opportunity to own a diverse portfolio of real estate properties in different markets throughout the country. In 2021, REIT net acquisitions reached a record-high $67.8 billion, with residential REIT acquisitions hitting $6.2 billion, underscoring the possibilities for investors to own real estate without having to make individual purchases on their own.
Once a property is acquired by the REIT, it enters into the renovation phase of the Growth REIT cycle. Check back next week to keep up with this real estate investment journey.
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