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Steven Fletcher

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.

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