Finding the opportunity through multiple marketing efforts 

Conducting physical and financial due diligence to screen the deal 

Creating and testing the business plans with several vendors 

Investor capital alignment and signing and closing with lender and seller 

Executing the business plan 

Managing the asset and driving the bottom line 

Preparing for refinance and sale

The cap rate comes up a few times within our analysis. To start we can determine our "going in" cap rate by taking the NOI (Net Operating Income) and dividing by the purchase price of the property. Ex. 100,000 NOI / 2,000,000 purchase price = .05 or a 5 cap. We underwrite the market going in cap rate as a basis for projecting future cap rates such as the one at year 1-3 when we refinance and years 5-10 when we sell. We add 10 - 15 basis points annually in our projections to create a conservative picture of outcomes. By adding 10 - 15 basis points we are essentially betting against the market and saying the properties cash flows will be worth less every year. Market and property specific factors determine a fair market cap rate for different asset classes within locations.

Physical vacancy is the amount of units that aren't physically occupied divided by the total number of units. If 2 units are physically vacant at our 20 unit the vacancy rate is 2 / 20 = 10%  

Economic vacancy is the amount of tenants that are actually paying. If 2 units are physically vacant at our 20 unit the vacancy rate is 2 / 20 = 10%.  If 1 of the other 18 units tenants is not currently paying our total vacancy is now 3 / 20 which is 15%.

Gross potential income- 100% occupancy (the most the property could bring in) 

Operating expenses- Day to day operations   

Non operating expenses- Interest on debt , non core related activities/ restructuring of the property 

NOI- Net operating Income = Gross income - Expenses (Annualized) 

COC- Cash on cash return = annual return / cash in deal 

IRR- Internal rate of return takes the time value of money into account and weighs heavily on getting money back sooner

Some of the risks include a market downturn resulting in non paying tenants and a disruption of the execution of the business plan. Lending terms could tighten off setting the refinance terms or sale terms a potential buyer would pay to achieve their desired returns. Our overall projections can be overly or underly conservative as it's very hard to predict several years into the future, therefore, we try and build a not so attractive model to stress test the deal.

A few ways we mitigate risk are by analyzing the specific locations economics and demographics of which the property is located. Is there a value add component we can exploit? Is our underwriting conservative? Does our project manager and property manager deem the plan feasible? Do our mentors and advisors agree with the business plan once finalized? Under promising and over delivering is more attractive then the other way around. We aim to remain conservative and realistic with our projections.

Deal by deal return expectations vary greatly by the specific property and the business plan. Stabile properties may yield an attractive quarterly distribution yet return less on a sale or refinance vs. a heavy value add deal may return slim quarterly distributions until the refinance returns capital and boosts those returns as the property may have increased vacancies during the renovation period.  We target 7-8% quarterly preferred returns and a targeted internal rate of return of 12% or greater. Cash out refinance vs sale as loans aren't taxed because it's a loan not income. Sales trigger capital gain taxes.

Location

Age and Construction

Asset Class

Value add components? 

Investor returns?

Investors get paid quarterly preferred returns (Before general partners) and splits on any income beyond the targeted preferred return. They then receive initial capital back upon refinance which boosts returns as less cash left in the property yields a higher cash on cash return. Finally, they receive a split of the sale proceeds which is deal dependent and typically ranges from 50/50 to 80/20.

The syndication model is great for our investors and ourselves as it provides a great opportunity for our investors to be limited partners on the deals (hands off) and still take part in all of the upsides. Limited only up to the amount of capital they contribute to the deal they do not have to personally guarantee any of the loans. Since they are considered partners they are able to offset the rental income they receive by utilizing the depreciation. We order a cost segregation study which essentially puts a life span on physical components of the property and allows us to deduct those values over time against the income. The model is great for us as we can scale beyond what we could ordinarily with the limits of our own capital.

In this episode we touch on why we are specifically investing in Central and Southern Ohio. Landlord laws, taxes, population and job growth, job diversity, and affordability for tenants are some of the many attractive features these markets have to offer.

Things we look for within the value add approach include below market rents, ability to upgrade units, capex/repairs needed, laundry, vending, any amenities we can add, utility billbacks, reduced vacancies, tightened operations management wise, etc.

We target Class B- and C assets that are typically 20+ years old. We seek value add opportunities that yield desirable returns for ourselves and our investors as stable assets to hold for the foreseeable future.

Comparatively to real estate as a whole multi-family investments are even more attractive.  We are able to make money off the monthly rental income, the equity we've increased in the property credit to our value-add model which would be accessible through a sale or refinance,  the equity our tenants build through paying down our mortgage increasing our overall equity even more, and the tax benefits such as depreciation that come along with all this. Along with these we also look at the risk factors. Multi-family has proven resilient in times of inflation as rents are increased accordingly. During downturns Class C assets (Mid grade / work force housing) rarely faces rental rate issues. Demand often increases as your higher end tenants in Class A assets seek more affordable options.

Why invest in real estate..  Real estate is a proven asset with an extremely long track record. They're not making more land and a place to live is as essential as food or water. Real estate is attractive financially because we are able to make money off the monthly rental income, the equity we've grown in the property via our value-add model accessible through a sale or refinance,  the equity our tenants build through paying down our mortgage increasing our overall equity even more, and the tax benefits such as depreciation that come along with all this.

We have made a series of FAQ and informational talking points to aid our investors in understanding our model and some of the intricacies involved.