Analyzing Apartment Buildings

[Matthew Rembish]

So I've been in real estate for a while now, but I've primarily flipped homes and invested in single-family rentals. Over the last year, I've been educating myself a lot more on apartment buildings and although I feel I have a much better grasp on them, I still feel as though I wouldn't know a good deal if it personally reached out to me. I'm good with most of the return metrics such as COC and DSCR but when it comes to IRR, what are most people out there typically looking for? I know that is a subjective question and geographically specific but for those of you investing in the New Jersey or Florida areas, what is typically a number for this that you look for and how does that change if you're syndicating a deal. It's my understanding that preferred, realistic numbers are usually in the high 'teens or twenties for IRR (at least in the exit year) but can anyone offer some additional insight into how they look at these kinds of multifamily deals? Thanks!

[Evan Polaski]

@Matthew Rembish, as you mentioned, this is very subjective and there are several ways to express this. IRR will typically be presented as either gross (project level) or net (investor level). If you are looking at taking down a deal by yourself, or with active partners, the project level IRR is more important. If you are syndicating the deal, and have investors, you will want to present the net IRR, which is net of all fees and carried interest.

For me, mid-teens, net to LP for value add properties in 1mm+ population MSAs seems to be fairly standard.  When you get to the 24 hour cities and/or core investments, that will go down to high single digit/low double digits.  Go to small-town USA and/or opportunistic properties, that will go up to high teens/low twenties.

Then you have to factor in the operator. An experienced operator is likely lower risk than an unproven operator, so the IRR can be lower for the experienced operator, all else being equal.

Other factors that come into play, hold period (shorter hold will typically yield a higher IRR). Leverage is already in your calculations with DSCR, but the higher leverage should mean higher IRR, since it adds risk to the property. For the net IRR, fees, pref and carried interest all effect the IRR.