Revisiting Our Thesis

The real estate business isn't rocket science but it does require the integration of countless details and sub-market knowledge to execute at a high level.

As you may know, our approach is quite simple:

1.) We buy architecturally defining apartment buildings in walkable, supply constrained markets.

"Supply constrained" indicates that it's incredibly difficult to execute construction in these locations and even harder to produce new inventory.

The neighborhoods we target are all located within historic districts, which govern all development within their boundaries.

Within these areas, you're forced to work with what you have.

You can't tear down a duplex to build 25 new apartments (they didn't build too many large apartment complexes in the 1920's so these are largely 2-10 unit properties).

For the most part, the inventory that currently exists will comprise the majority of apartments in the future as well.

A great predicament for us.

"Architecturally defining" just means historic and/or cool.

We have no interest in buying sardine cans in the suburbs with vinyl siding. 

2.) Underwrite and utilize leverage conservatively

We're not looking for a quick rip and instead, focus on stabilized yield on cost over long-term holding periods.

3.) Execute quality construction and property management

We do things the right way: submit permits weeks to months in advance of deadlines, use vetted/licensed contractors, purchase quality materials (that will last), and steward properties well.

4.) Refinance them opportunistically to return capital in a tax efficient manner.

-While still maintaining ownership and income streams

5.) Hold them indefinitely

Our strategy is merely what the wealthiest families in our markets have done for decades.

Buy good assets and keep them for a long time.

Due-Diligence

Thorough due diligence is crucial for the long-term success of a real estate investment.

The due diligence phase immediately follows the completion of the purchase agreement and typically lasts 2-12+ weeks depending on the deal.

During this period, we tour units, determine costs, finalize financing, and firm up underwriting.

To better inform the above, we always seek to obtain and review:

1.) Property Inspections (both general and plumbing)

2.) Lease Agreements

3.) P&L Statements

4.) Eviction Records

5.) Elevation Studies, Plans, Surveys

6.) Capital Improvements Schedule

7.) Utility Bills and Meter Counts

8.) Current Tax Bills & Appeals

9.) Title Reports

10.) Licenses and Permits

11.) Vendor Lists

12.) Miscellaneous Items Depending on the Deal

The Apartment Stack

Someone inquired about what kind of renovations we do and what kind of product we seek to create.

Essentially, asking where we sit in the stack of apartment classes- which prompted an explanation of them.

Apartment complexes are generally categorized from Class C to luxury and vary widely in quality, amenities, and target demographics.

Class C Apartments: Budget-Friendly

Class C apartments are the most affordable option, typically older and located in less desirable neighborhoods. No frills, just a place to live.

Appeal: Class C apartments attract budget-conscious renters like students, working-class individuals, and those with lower incomes that typically leverage municipal housing vouchers (section 8). Very intensive property management processes are required as these assets typically have the most issues.

Class B Apartments: Middle Tier

Class B apartments offer a middle ground, being newer and in better neighborhoods than Class C. Typically nicer finishes and (some) amenities.

Appeal: Class B apartments cater to work-force housing in addition to young professionals, and small families. Higher credit tenant base than Class C and with generally less headaches.

Class A Apartments: Modern Living

Class A apartments are newer, located in desirable neighborhoods, and feature high-end finishes/materials.

Appeal: Class A apartments attract higher-income individuals, from older couples to high earning young professionals. These renters are willing to pay a premium for proximity to work, dining, and entertainment. Typically, responsible tenants, resulting in less management issues.

Luxury Apartments: The Peak

The top tier of the market, offering opulent finishes, expansive floor plans, and cutting-edge amenities, usually in the most desirable locations.

Appeal: Cater to the wealthiest renters who seek privacy, security, and access to the best parts of the surrounding area.

_________

The apartment market is diverse and each class serves a specific demographic and presents their own risks/rewards.

We choose to focus on the Class A space for the following reasons:

-Higher Credit Tenant Base- implying more stability in rent collections.

-Premiums on Rents - these assets command higher rent rolls due to their location, and newer construction/renovations, leading to greater rental income.

-Demand - high earning professionals want to live in nice apartments in nice areas- there are only so many of these in our target areas and it’s very hard to add more.

-Maintenance and Upkeep - newly renovated properties require less immediate maintenance and fewer capital expenditures compared to older Class B or C properties.

-The Dirt - desirable locations tend to appreciate at faster rates than others. If it’s hard to add new inventory into an area that people will continue to seek out, signs point to growth over time.