There are major things you need to look for when buying a multifamily property.
I’m going to show you what they are, and the dangers of not having them.
Transcripts:
Chris Bounds 00:00
What are your top KPIs? When you’re looking at an opportunity? Obviously, there’s a lot of numbers that go into men, not just numbers, because there’s still management, there’s the location and there are all kinds of things. But what are some of the top KPIs that you look for to give you that quick understanding that, “Hey, this is a deal worth looking into more?” Because you can, I mean, a full underwriting of an apartment complex, which is a business, it takes some time. But before you start investing that time, what are some of the top things that you’re looking at that, “Hey, I think this is worth looking into. Let’s dive in deeper into that. You can’t change that.
I mean, you can’t change the way the property looks and the way it’s managed. I was going to because you’re the underwriter Cody’s our acquisitions guy, but I want to real quick just highlight before Cody gets into the details because I know he will. I think for investors, especially because I focus on Investor Relations and Marketing and things of that nature. And I think Cody, correct me if I’m wrong, we’ve gotten better about this, even just looking at a deal hits your inbox, the story in the location is so important. Forget the dollars, it could be the best deal on paper. But if it’s a D class asset and a D class neighborhood, it doesn’t matter what type of returns it pushes out. Right. The story is so important, the location is so important because at the end of the day, we’re raising capital and we’re partnering with other investors who want the returns of you know, the capital returns and the equity appreciation and tax benefits.
Nobody wants to be owned this junk building in some town that they’ve never heard of. And then you got to think about your exit who’s buying that. Right. You might find this amazing deal. Four hours away from Houston and some town that nobody’s ever heard of that’s got 500 people. Exactly. So I think we’ve gotten better at before we start looking at the details of KPIs and Cap Rates and all that stuff. It’s like, “Okay, where’s this at? And what’s the story? I f it’s good, if we liked the location and we liked the story of the property, we feel like this is something we can buy into ourselves and then therefore confidently pass it on to our investors. When we’re raising capital, then we proceed. I’ll let Cody take it from here.
Cody Laughlin 01:56
Yeah. That’s a great intro to that conversation, Brian. I mean, you’re exactly right. It’s comes down to location and story for sure. So first off, we look at the market. Is it a market that we’re is our target market is do we want to be invested in and then we bolt down to the micro market, is this in a particular sub market within that general area that we want to be invested in? So you know, if we’re looking at Houston, San Antonio, we have very defined micro markets that we particularly focus our interest in. And anything outside of that, it just goes immediately to the jump box, we don’t even take a look at it. Right. And then, like you said, we look at the deal, you know, does it fit?
Does it fit our investing thesis? Right now, we’re very much leaning towards the Core Plus assets. Right. So anything that’s a newer building stabilized occupancy. We don’t want to deep value add reposition type products right now, just because we feel like on a risk-adjusted basis. It doesn’t make the most sense right now. So but then looking at the property level, you know, then you got to look at things like, “Hey, what’s the in-place cash flow, net operating income, can that support good debt?” You know, if I’m gonna go buy a building on a five-year hold, can I secure the debt that matches that five-year business plan? You know, so that’s the first thing I look at is what’s the in-place cash flow and net operating income? And can I support the new debt?
The second thing is I look at what’s the overall gross potential income. Where it is now? And then what’s the delta as far as the market comes? Can we increase that gross potential income through either a value add strategy or capturing other income like fees and whatever other items that may be missing? And then looking at the expenses, are there anything on the expense side that we can reduce or maybe cut that is running a little heavy and just trying to get that story? And kind of keep this general without going into much in the weeds here. So looking at again, the gross potential income over the expenses. And then really, where does that fit into where the market performance is right now? But really, it just comes down. Most importantly, is the in-place cash flow and the debt?
Chris Bounds 04:06
You touched on two terms that let’s just highlight for those who don’t know what they are, you should core and core plus, just a brief explanation on what those are?
Cody Laughlin 04:17
Yeah. Sorry. So that’s your A and B class produc. Right. So that’s your buildings that are typically new or let’s call it 1990s to present date building, they typically have better amenities. You know, that are more modern amenities, and modern finishes in throughout the community, that appeal to today’s current standard of living and typically our better position.
Most of the time and better ideal. Micro markets are locations within a certain sub-market. So you’re more of your value add or opportunistic deals are again, those older buildings, let’s call it 60s, 70s and 80s vintage, a lot of deferred may nets. It needs a lot of heavy lifting, so to speak, to really reposition it back up to market standard.
Chris Bounds 05:06
Yeah. I call those well-located opportunistic deals. The huge value adds.