What are your top 3 metrics for evaluating a deal and why?

[Mike Krieg]

I've noticed investors emphasize some metrics over others. Clearly it's best to look at as many as you can in any deal. But I'm just curious which ones are your favorites and why?

[Brian Burke]

The most important one is rent being achieved by nearby similar comps that are renovated to a similar level to which I would take the property.  This allows me to compare the in-place rents to the potential future rents and calculate the lift I can achieve after making improvements.  If the lift is small the deal is very unlikely to work.  I need to be able to create a minimum of $150 in rent bump for most deals to pencil.

The second most important is the IRR. Because my deals are syndicated to our client base of high-net-worth investors, there is a certain level where the IRR needs to be on any given deal to give me confidence that we can get it fully subscribed. This IRR varies depending on a lot of factors and is really a judgment call. It generally needs to be in the mid-teens for a typical B-Class value-add multifamily deal.

Third is cash-on-cash return, for the same reason as IRR. I'm mostly looking at the average over the hold period and the CoC for each year of the hold. Those just need to be reasonable and sell-able. First year CoC is less important as people tend to understand that most value-add multifamily deals have low CoC in year 1 as the renovation plan is underway.

That said, the ability to achieve the desired IRR and CoC is highly dependent on the first metric--rent bumps. Some might wonder why that is...well, the answer is that if you are underwriting properly, you are using conservative vacancy factors, decompressing cap rates, above-market debt interest rates, conservative property tax assumptions, etc...even if the property is performing better today. In order to counter-balance those negatives you need a hedge, and that hedge is higher rent.

And those are only the top three.  There are so many other metrics that I study on every acquisition.  Here are a few (in no particular order):

• Exit Value
• Replacement Cost
• Portion of IRR attributable to cash flow versus reversion (sale)
• Unleveraged IRR
• Equity Multiple
• Debt Coverage Ratio
• Loan to Value (every year throughout the hold)
• Break Even Occupancy
• Default Ratio
• Revenue Stress Test
• A few others that are a bit obscure and not that important

You might notice one metric that is conspicuously missing:  Cap Rate.  I don't care about cap rate.  It just must be market for the type of property we are buying in the area in which we are buying it.  The only thing I use cap rate for is predicting the future exit value of the property by using today's market cap rates and inflating them for a time adjustment.  Outside of that, cap rate is of little value as a metric to predict investment outcomes.