By Coleman Cox

November 13, 2024

At Vintage we currently cover 3 markets: San Diego, Phoenix, and Orange County. Across these markets, we generally see 25+ new multifamily acquisition investment opportunities per week that fit our deal size parameters (roughly $3M – $30M total capitalization) – some on-market, some poorly marketed, some off-market. In this post I’ll walk through the different layers to our review process of an acquisition opportunity and what we focus on in each layer.

The first layer is a more subjective pre-screen focused on location, guidance price-per-unit and price-per-square-foot, and the “story”. The goal of this first layer is to decide: (i) move on to next step and underwrite, or (ii) pass and spend no further time.

• Location is always filter #1: we use a pipeline software called TermSheet that allows us to visualize all opportunities on a map. Each point on the map is linked to all of the underlying data we have collected including the source of the information, which allows us to efficiently hit each of our pre-screen items all at once – a plug for TermSheet which has been an awesome pipeline software solution for us. This pre-screen is all about identifying an immediate “pass” because it is in location we’re not comfortable with. Everything else moves on to the next filter with varying degrees of excitement / prioritization based on the submarkets and micro-locations we like best.
• Filter #2 and #3 happen simultaneously (guidance pricing and story): A combination of price-per-unit and price-per-square foot alongside our knowledge of the rents achievable in the submarkets we cover gives us an initial sense of how compelling the opportunity is going to be. There are certain locations we like so much that we will commit to underwriting every deal that we see, regardless of how unrealistic guidance pricing is. The “story” we’re referring to here is related to who the seller is, why they’re selling, and how the opportunity came to us (fully marketed, under-marketed, off-market, who brought us the deal, etc.). There are certain stories that are more compelling than others: less sophisticated sellers/listing agents, under-marketed or off market opportunities, a seller that has some external motivation to sell, etc. These situations will also push us towards underwriting an opportunity regardless of the guidance pricing.

Once an opportunity moves on to the next layer of review, we need to be able to quickly analyze the opportunity and assess what price we’d be willing to pay for the asset to generate a sufficient return for our investors.

The price we’re willing to pay for an asset has nothing to do with the guidance pricing provided to us by the broker or seller.

There are a lot of important underwriting metrics to review when evaluating an opportunity that can be complex, time consuming, and highly “assumption-driven” (i.e., very dependent on forward looking assumptions that are outside of our control such as interest rates, future cap rates, rent growth, among others). Our north star return metric that we use to price assets is un-trended unlevered stabilized cash yield. Let’s break this down a bit:

• Un-trended: meaning this metric does not include any forward-looking assumptions for rent growth or expense growth. We are simply focused on rents that are achievable today, and our knowledge of the cost to run these properties today.
• Unlevered: this metric does not include the impact of leverage. We are in the business of buying and paying for real estate and the associated future cash flows. We are not in the business of paying for “good” debt.
• Stabilized: meaning after completion of the business plan – whether that be capturing operational upside, or completing a CapEx plan to improve the asset / units. We are generally targeting assets that are not currently running at their optimal state, allowing us to pay less for the asset and create the value ourselves.
• Cash yield: What is the total amount of Day 1 capital needed to fund the asset as the denominator (this includes purchase price, capital expenditures, closing costs, working capital needed to operate the asset, sponsor fees, etc.). And what is the true free-cash-flow of the asset as the numerator (this includes all operating expenses as well as non-operating expenses such as year-end tax and accounting fees, CapEx reserves, and any ongoing sponsor fees).

We like this metric for a few key reasons: (i) there is absolutely nothing hiding here – any up-front or ongoing source and use of cash is captured; (ii) it is based on real-time data that we can reasonably predict (i.e., excludes forward looking interest rate estimates, growth estimates, or exit pricing assumptions); (iii) it is consistent and easily comparable over time – every deal we underwrite now becomes a datapoint for future use; and especially for this part of the review process, (iv) because we can calculate it very quickly – generally within ~30 minutes we can complete a “back-of-the-napkin” underwriting that calculates the price we’ll pay for the asset to generate appropriate yield for our investors.

At this point in the process, depending on the subjective components of Layer #1 and our price-point in Layer #2, we will either (i) work with our broker or seller rep to explain our “back-of-the-napkin” pricing and discuss whether it will be worthwhile to sharpen our pencil and dig in further, or (ii) pass on the opportunity.

Once we elect to dig in further, it is generally because we like the opportunity and believe we have a real chance of acquiring it at our desired price point. This is when we’ll begin to invest a lot of time in fully understanding the opportunity and organizing the appropriate materials to explain the opportunity to our investor base: (i) qualitative deal memo, (ii) Discounted Cash Flow (DCF) model, (iii) Rent comps, (iv) Sales comps, at a minimum. The DCF model will incorporate many other important return metrics and safety metrics that are not included in our back-of-the-napkin model, that include the impact of future growth, exit assumptions, financing assumptions, etc. Some of these more important metrics are highlighted below:

• Return metrics:
  • Un-trended unlevered cash yield
  • Trended unlevered cash yield
  • Cash-on-cash return
  • IRR
  • Equity multiple
• Safety metrics:
  • Debt Service Coverage Ratio (DSCR)
  • Loan-to-Value (LTV) ratio
  • Appreciation CAGR

This process allows us to be efficient with our time while covering a lot of volume with a lean team. I’m a firm believer that in order to identify a great investment opportunity, you must have seen a significant amount of other similar opportunities. In the last ~12 months, we’ve seen ~1,000 deals, underwritten ~350 deals, offered on ~10 deals, and closed 1 deal. Finding great deals is not easy – it takes hard work and efficient processes and systems to ensure you uncover the best opportunities available in your markets for your investors.