The Metrics We Need

Today we’re going to dig into our acquisition and what metrics we expect for the projects we take on.

As you know, our buying criteria is relatively narrow and encompasses the following:

1.) We only buy sub-institutional apartment buildings between 4-15 units.

2.) We seek out walkable, class A urban cores with supply constraints.

3.) We need angles to create value through operations or construction, allowing us to “make money” on the buy.

4.) The assets must exhibit the potential to be architecturally defining if they’re not already.

With that said, there’s specific metrics we need to achieve to move forward with a purchase and ultimately take on risk.

After collecting due-diligence materials (rent rolls, maintenance reports, capital improvements schedule, etc.), we verify all numbers and then assess how we would approach the building.

When analyzing the current rent and projecting the market rent, brokers will compare units by the number of bedrooms but don’t account for differences in square footage, what floor units are on, views, etc.

We pay no mind to the current rent rolls given we’re largely buying from generational owners who aren’t optimizing.

Are they leaving money on the table, yes.

Do they have less headaches and tenants that have never sent a maintenance request, yes.

These situations largely work in our favor and are a contributing factor to why we focus on the “forgotten middle tier” of these multifamily assets. 

We’re always careful to analyze the floor plan of each unit, square footage, lighting, etc. to get the full picture of how much we could charge upon the completion of renovations (a studio with a balcony will achieve higher rents than one without).

Next, we gauge renovation costs through our inspection reports/estimates that are executed during the due-diligence period and formulate our contingency budget- we target a minimum of a 25% return on our renovation expenses.

We then model out downside, base, and upside case scenarios.

If the property can’t withstand a ~20% decrease in income (ie. rents don't cover overhead), we need to make an adjustment. 

If the property doesn’t perform well without the assumption of rent growth (which we don’t underwrite), we need to make an adjustment.

It all comes down to having a refined process and accounting for the uncertainties that every project has.

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