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  • Steven Fletcher

Why Sub-Institutional Multifamily?

There are many tiers of multifamily buildings ranging from duplexes to 1,000+ unit apartment complexes.


Each tier has its typical incumbents and characteristics. 


The owner of a 20 unit apartment complex is likely much different than the owner of the 400 unit apartment complex. 


As you get below the ~$25m range, these deals are deemed to be sub-institutional.


Meaning, the check size is too small to garner interest from these organizations. Makes sense if you need to deploy billions of dollars.


There are also many tiers within this sub-institutional range but we'll generalize for now.


For the most part, assets that are sub-institutional are typically owned by HNWI's, mom and pop operations, Uncle Jimmy who picked up 50 units for $100k in 1975, etc. 


So why focus on sub-institutional? 


The properties owned by institutions are operated by professionals whose full time job was to source, develop, and stabilize the asset in discussion. 


Moreover, they can leverage billion dollar balance sheets to ultimately secure property and carry out their thesis.


We're not interested in competing with these organizations.


Instead, 


We focus on the properties that aren't operated by big real estate organizations as they provide more opportunities for us to add value.


These assets often aren't optimized for performance and instead, are treated as the secondary sources of income that they are.


Some examples:


Self Management- we still see owners who go door to door to collect rent checks on the first of each month and/or elect to keep rents low to avoid turnover.


Condition- you often won't see preventative maintenance or annual inspections with these building types. This can lead to the deterioration of the property over time, especially if capital expenditures aren't budgeted for.


Exit Strategies- the owners of sub-institutional assets likely aren't working with limited partners nor do they need to exit at a certain cap rate. They're often long-time holders who will be earning a great multiple on their investment no matter the final price.


Focusing on this asset class affords us with:


1.) Limited competition and a smaller buyer pool- our niche is targeting assets that are too large for the average mom and pop operator but too small to garner interest from institutional investors, leaving us a nice sweet spot.


2.) The potential for higher returns given the prevalence of inefficiencies. Our minimum return threshold needs to be higher than most given that we're sharing ownership stakes with our partners. From integrating professional management to executing renovations, these are all outlets to increase performance.


3.) Mobility- Naturally, a 20 unit apartment complex should require a much shorter renovation period than a 400 unit. These shorter timelines allow us to return properties back into commerce and stabilize them at faster rates.


4.) Less downside risk (we're of course sacrificing scale).

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