In my current gig as an investor in multifamily real estate, I've encountered the interesting and bizarre. And while nothing I'm about to write will re-invent the wheel as it pertains to my chosen profession, I still felt it was worth a little bit of ink spilled to jot down some thoughts.
-There are really three ways to measure an investment when you're underwriting:
1) Cap Rate, or year 1 yield on purchase price
2) Price Per Pound, or price paid for each unit
3) IRR, which tells you the annualized rate of return over the life of the hold period (however long that is)
From my standpoint, number 3 is total bullshit. Especially when it's used to analyze a deal more than 2 or 3 years out. The notion that you can possibly make a good prediction on rental growth rates and the trajectory of repairs and maintenance expense some 7 to 10 years in the future is foolish. It also provides the analyst with a lot of flexibility to paint a bullish or bearish picture, depending on the mandate. So, it's a little slippery. But, for whatever reason, most funds market themselves on the basis of exactly that -- "we're going to hold our assets for 8 years and anticipate low 20 returns during that time".
The other two can provide more insight, but context is very important. Starting with cap rates, you could have a situation where a 4-cap is a better deal than a 6-cap. If the former is coming off of depressed numbers because of recession but it's an asset in a good market, and the latter is peak pricing in a tertiary market during boom boom times, you can probably make the case for the "more expensive" investment. Again, context matters. The same can be said for price per pound. Is $150k per door reasonable in light of comparable trades and repro cost? Hopefully you can answer that question based on a thorough analysis of the market you're dealing with. Thus, when price per unit is used in tandem with a cogent and thoughtful view of cap rates, you put yourself in a position to invest well. And, if you have the ability to assess the current macro story reasonably on point, you're really in good shape.
-I saw the news that Morgan Stanley real estate funds got an extension on Fund VII, granting them the right to spend roughly $2.1 billion in equity over the next 12 to 18 months. If I had any assets in the markets they're looking at, I would consider hitting the bid during that time.
