3 Things

Written by Tyler Kastelberg

September 12, 2021

Happy Sunday!

Last week I foreshadowed a discussion on the marketing strategies that have (and haven’t) worked at Bullpen. However, I’m going to punt that discussion and share 3 things that I found insightful this week (hopefully you do too). 

“Stabilized Unlevered Yield on Cost” is the most important underwriting metric

Barrett Linburg wrote a Twitter post about his use of stabilized unlevered yield on cost as a back-of-the-envelope metric to assess value-add deals. I’ve copied the text from his post below:

From Barrett … “I do heavy value add multifamily deals and talk about “Stabilized Unlevered Yield on Cost” as the most important underwriting metric. I know @moseskagan views it the same way. It is super simple and often misunderstood. 

Like many things in business…part of the confusion comes from different people calling it different things. In school, my professor just called it ROC. As in: “What’s the ROC?” I’ve heard yield on cost, unlevered return on cost, and several other variations.

Bottom line…it is simple “back of the envelope” math. Numerator: NOI after you have done all of the required rehab and gotten the project leased up at market rents. Denominator: Purchase Price + Rehab Costs + Closing/Deal Costs.

Notice a few things about the above calculation:

  • No rent growth calculation into eternity
  • No projection of exit cap rates
  • Doesn’t even look at interest rates

This truly allows you to compare apples to apples without getting distracted.

Even though it’s simple math, the output can be WAY off or easily manipulated by overstating the stabilized rents or under-budgeting CapEx. As a GP, you have to be honest with yourself or trust very experienced management partners. As an LP, you have to really trust the GP.

Since my first building in 2012, this has been my first screening method. I want the ROC to be 150-200+ bps above the market cap rate for the asset I will own once I am done. In this great market, it has created home runs…I think even with a correction it will lead to winners.”

PS – I don’t know Barrett personally. If you do, forward this to him and say thank you.

Basic Guide to Low Income Housing Tax Credits

I spoke with a buddy this week who is doing LIHTC and HTC projects in West Virginia. By syndicating the credits, he is doing these deals with no equity investment. Yes, he does $10+ million dollar developments without putting a penny into them.

Coincidently, Bullpen’s editors finished and published a VERY easy-to-read guide on LIHTC. Give it a read, and let me know if you have any questions.

3 Top Cities to Invest in the Electric Car Revolution

Our team did some research on markets that we believe will thrive alongside the electric vehicle revolution. We used the following characteristic to choose our top cities …

  • High Concentration of Intellectual Capital:  Electric cars are a complex combination of hardware and software.  Cities with high concentrations of intellectual capital in both disciplines are attractive to car manufacturers and their vendors.
  • Regulatory Acceptance:  There is no doubt that electric cars are at the forefront of technological innovation, but regulators have not necessarily kept up.  Cities with progressive governmental policies and the funding to provide incentives stand to benefit the most.
  • Manufacturing Infrastructure:  Manufacturing electric cars at scale is no small feat.  It takes an incredible amount of capital, facilities, and infrastructure to do it well.  Not all cities have this.
  • Existing Relationships:  While not necessarily new, electric cars are still in the early stages of development.  Cities that have existing relationships with major players in the industry have a head start over their competitors.
  • Electric Automobile Ecosystem:  It takes hundreds, even thousands of parts to build an electric automobile.  Potentially lucrative markets are those that don’t just focus on one or two companies but on creating an entire ecosystem of manufacturers, suppliers, software developers, and owners who work in harmony to increase the adoption of electric automobiles.

Where did we land?

  • Phoenix, AZ
  • Austin, TX
  • Pittsburgh, PA

Read why in the full article here: Three Real Estate Markets That Will Benefit From The Electric Car Revolution

That’s all for this week! If this email was forwarded to you (and you like it), subscribe here.

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