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In this article we will discuss distressed assets.

What is a distressed asset in commercial real estate? A distressed asset is an asset that is not stabilized, meaning not over 90% occupied.  There are a few other factors as well, not just stabilization, that define a distressed asset.  An asset can become distressed due to property management and or investment management inefficiency. An asset can be distressed due to the lack of capital for project.  There may not have been enough capital for renovation or working capital and capital expenditures. Another form of distress is on the financing side.  The mortgage payment or debt service may not be covered if the asset is not stabilized, and the occupancy is low.  Additionally, an asset can be distressed due to some type of physical event to the property such as a fire, wind, hail, hurricane, or flood. There could be many reasons an asset is distressed.

Currently, in 2023, assets are becoming distressed because of leverage and interest rate increases. In the last three years, during the market run up, the values on assets were so high that investors and companies were over leveraging deals. They used “floating” rate debt.  Interest rates are significantly higher, almost double what they were over a year ago. This causes debt service payments to increase significantly, eating into cash flow.  Given higher interest rates, these assets are worth 30 percent less than they were before because the cost to borrow capital to purchase investment properties is so much higher. Some of the owners are having to pay out of pocket to cover debt service and other expenses. Because of this, they are distressed, even if the property is stabilized and performing well.

Why do investors like distressed assets? Investors like distressed assets because they can acquire properties that were once valued high for a much lower value. This means 50 cents, 60 cents, 70 cents on the dollar in some cases. If they hold that asset for two to three to five years, they are betting on the market turning around.  They know where the values used to be at the height of the market and hope to profit once the market stabilizes. Investors know that if they are buying at a discount to market, it will be hard to lose money.

The investment thesis or style of pursuing distressed assets is call being opportunistic.  

Opportunistic investments (distressed deals) are for capital growth minded investors.  Most opportunistic assets do not cash flow and require intense capital injection and operational management.  The risk is high, and the reward is high.

At APTVEST, we’ve purchased properties that were distressed.  For instance, one project was 60 percent occupied, and we took the property to 0 percent occupancy and through capital injection and aggressive management, turned the project around and had it reach stabilization at 90+ percent occupancy.  This can be viewed in the case study section within our library.

Valuing a distressed asset to determine what price to pay for the project is not as straight forward as using a Cap Rate like a stabilized deal.  These types of deals do not trade on a cap rate basis. They trade on what’s called a price per pound, or a price per unit basis. That can be determined relative to current marketplace conditions.  Distressed assets can be financed.  Lending providers will review the investor or ownership groups experience given the risk of the project.  Proforma income via rents and expenses will be used to determine pricing and financing leverage.

Distressed deals usually have some type of “bad” operator.  This means, an inexperience operator or firm acquired the asset and poorly managed the investment operations.  For instance, maybe the operator didn't know how to operate a rental real estate business.  The owner/operator could also live out of state from the location of the project.  This causes distress due to the lack of physical oversight. In Texas, we see a lot of California and northeastern owners that are trying to operate from a distance with just an onsite manager. They trust what the manager is telling them and rarely visit the property.  This can cause a lack of regular oversight.  There is nothing wrong with not having a local presence where an investment project is located, but more oversight in this scenario is recommended.

An asset can also become physically distressed because of poor renovation management.  Maybe there was an unscrupulous contractor that underperformed or didn’t complete their work. In this case the operator is unable to renovate the property and finish the business plan.  “An act of God” such as a fire, tornado etc. can cause distress.  If the project is under insured, there may not be enough insurance proceeds to repair the damage to the property. This causes your deals to be distressed.

There could be many variations of distressed - it’s not just physical, it can be operational. It’s also not just operational and physical, it could also be financial, and the way that the capital stack is structured for the project.  Distress asset investment requires vast experience and understanding of marketplace conditions.  Make sure the risk is worth the reward and the project aligns with your investment thesis.

If you are looking for distressed deals, make sure that you're with an experienced operator that has worked with distressed assets before. At APTVEST we have significant experience. We've completed several distressed asset projects.  

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This article will discuss investing vehicles as it pertains to commercial real estate, more specifically apartment communities.

There are several types of avenues to invest in apartment communities. This article will highlight each one, and then go into further detail.

The first vehicle is a real estate investment trust or REIT.  There are public REITs and private REITs.

The next vehicle would be a private equity firm. Specifically, there can be small firms, or robust firms.  An example of a robust firm would be Blackstone or Blackrock that have billions and billions of dollars of assets under management.  A small firm example would be a local firm that pools private investor capital to invest in one off multifamily projects.

Another vehicle would be a real estate fund. A real estate fund is a specific pool of capital that's raised for investing in multifamily investment property.  A real estate fund can be an equity fund or a debt fund.  The fund documents and prospectus will outline the specific parameters of the type of deals the fund administrators and partners plan to pursue.  Funds structures tend to be very rigid and rarely can pivot to others types of allocations that are not outlined in the fund legal documents.

Syndication is another vehicle used to invest in multifamily assets.  A syndication is a one-off private investment that is formed by a general partner(s) who is called the sponsor and they raise capital from a pool of investors for one specific investment.  These investors are known as limited partners (LP’s).

A syndication is a one-off private investment that is formed by a general partner(s) who is called the sponsor and they raise capital from a pool of investors for one specific investment.

Lastly, the newest vehicle in the investment marketplace are crowdfunding platforms.  On these platforms, investors can pool their money, just like a syndication, but in smaller increments - starting with $500.  These platforms are middlemen that connect real estate investment companies that are raising capital for their projects and investors looking to invest in projects seamlessly.  The platforms are paid a fee for their service.

The above serves as a brief overview of the various investing vehicles for commercial real estate/apartment communities. Below we will expand on each type.  

A real estate investment trust, or a REIT, is publicly traded, usually on an exchange, for example, the New York Stock Exchange, where you can invest in commercial real estate.  This is like investing in a stock. The investment is liquid versus illiquid. The REIT must distribute 95% of cash flow back to the investors at the end of the year. Because they are publicly traded, offering prospectus documents defines how the real estate investment trusts operate.  As we’ve covered in other articles within our library, typically, real estate investments are illiquid, and the time horizons of these real property investments can be three to five years, if not longer. Real estate investment trusts pioneered having real estate investments be liquid. The trusts will go to the public market and raise millions and millions of dollars for projects and operations.  With those funds they will go invest in assets. Your position in those investments, for however many shares that you purchase, can be traded like a stock.  This is attractive to investors who like real estate but don’t want their capital tied up for long periods of time.

Real estate investment trusts pioneered having real estate investments be liquid.

Next, let’s unpack private equity.  Private equity firms are firms that pool capital from investors for the purposes of investing in companies and private real estate investments.  These firms are not publicly traded, and they are relationship driven.  Their goal is to find experienced sponsorship real estate operators and continually invest with them.  This benefits you as an investor because these firms’ day to day activities include sourcing operators and deals, analyzing those groups and deals, providing equity financing, and then overseeing the project to completion.  Once completed they will provide you as an investor with a return on your investment.  The firm profits through asset management fees and a profit split for the effort of finding, investing in and overseeing the operating partners and deals.

A common investing vehicle used in real estate is syndication. A syndication is a form of private equity investing via a private investment vehicle called a private placement that is used for a single projects.  There will be a project sponsor, or general partner and limited partners.  The general partner is the captain of the ship and typically has majority control over decision making regarding the project.  The limited partners invest in the private offering via purchasing “shares”.  Limited partners typically have very little say in how a project goes and in the day-to-day decision-making process.  Syndication is attractive because general partners usually have the expertise of sourcing, analyzing, financing, and executing deals and investors or limited partners want access to these types of deals.  LP’s generally do not want to do much but reap the rewards of successful projects.  The birth of Crowdfunding has shined a spotlight on the syndication business model and brought this once private business to the forefront of real estate tidal wave.

Lastly, Crowdfunding platforms have taken the syndication model, even the private equity fund model, and thrown gasoline on the fire. They have created enormous platforms where they're connecting some of the largest investment firms in the nation to investors. These crowdfunding platforms have hundreds of 1000s of investors.  The wave of the future is the crowdfunding model where the access of information and deals is right at your fingertips.   With the click of a button, you can go and review a deal and invest. Gone are the days of having to know someone in real estate that you can invest alongside.  

There are many vehicles for you as an investor to pursue multifamily apartment community investments.  You should consider your risk tolerance and investment thesis to determine which one is best for you.

In this article we will review the types of debt financing available for multifamily apartment community investments.

There is a range of debt financing products that can be used to acquire apartment communities. In the traditional financial markets, debt is also known as a bond. If you think in terms of securities, you have a bond that you can purchase, or you can have a stock that you can purchase.  The stock would be equity ownership in a company. The bond is not ownership but is the debt obligation or credit that the company would owe as a debtor or creditor.

In Commercial Real Estate structured finance, the total capital used to finance a project, debt and equity, is referred to as the capital stack.  The capital stack in private equity may be referred to as the cap table.  The capital stack is zero to 100 percent of the capital used to acquire a multifamily apartment community.

Let’s further discuss the types of debt products that can be used for property acquisitions.

1. The first, in simple terms, is bank financing. Banks, large and small, like lending on commercial real estate to shore up their balance sheet.  Banks make money on the interest charged on these loans.  Banks are relationship driven.  They want to have deposits on hand from the person or companies using their products to finance acquisitions.  Bank debt is in most cases full recourse.  This means that the general partners of the project partnership will have to personally guarantee the loan via their net worth and liquidity.  Banks are conservative and want to ensure the capital they are lending is backed by collateral other than the real estate being financed.  This is to ensure that if the project doesn’t go as planned, the general partners are incentivized to correct the ship rather than giving up and letting the bank step in.  Banks are not in the real estate business; they are in the deposit and lending business.  Bank debt is very flexible given they are relationship driven.

2. The next would be bridge financing. Bridge is short term financing. It can be two to five years, typically around three years. Bridge financing sources could be banks, or it could be a debt fund. A debt fund is a group or a company that raises capital strictly to provide debt products on commercial real estate. Most bridge lenders are what we call balance sheet lenders. This means they are a financial firm, an investment firm, a bank, or some type of financial institution that holds the loan on their balance sheet.  Some bridge debt providers will sell their loans to the secondary market.  This is a benefit to the marketplace because the debt instrument is yielding interest and is backed by real estate.  Bridge lenders and their products lack the flexibility banks have and are transactional.  Their goal is to lend, make fees on the capital they are lending and receive interest payments on the capital they lend.  The more they lend, the more they make.

3. Another type of debt is called mezzanine debt. It sits between the senior lender and the bank or bridge debt. The goal with mezzanine financing is to get more leverage. As an example, you have 60 percent leverage, and you’re trying to push the leverage to 75 percent, that's where mezzanine financing would be used. It's a little higher interest rate, and there's no participation by the lender in the upside. They just sit in the middle of the capital stack.  Mezzanine debt providers specialize in this type of product and don’t tend to venture outside of this product type.  Mezzanine debt is used on heavier renovation projects and new development given the large value creation that will occur from the project.

4. The most common type of debt for multifamily apartment communities would be GSE or Government Sponsored Entity.  Fannie Mae and Freddie Mac are agencies of the Federal Government with mandates to lend on workforce housing.  The Government understands the need for investment into apartment communities by the private markets and they are willing to provide low-cost debt financing to incentivize investors to buy and sell apartment buildings.  Agency financing is very attractive, low rate, government backed and best of all is non-recourse.  Non-Recourse means it’s strictly asset based with no liability to the sponsorship group if the project doesn’t go as planned.

5. There's also private debt. You can have private capital that you borrow for debt financing from a private lender.  It’s very rare and requires a high net worth individual or company that is seeking to provide debt products.  The interest rates tend to be higher than the market but provide the project flexibility that other lenders may not.

6. There are hard money loans for deals as well. These loans are short term, high interest, and expensive.  It’s common in single family investing but is challenging in apartment community investing because of how expensive and finite the timing of the terms can be.  These two things can make the project have more risk and is only recommended on heavy renovation projects and for sponsors with experience and a finance background.

7. Lastly, another form of debt financing is participating debt. Participating debt means a company that lends on multifamily and other CRE assets as debt, but they also participate in the upside of the deal, how an equity partner would in other scenarios.  This is attractive to real estate sponsors, or general partners, because they don't have to give up an enormous piece of the upside to equity partners. Participating debt products mainly come from life insurance companies.  It can be higher leverage.  Life insurance companies are risk averse and tend to be more Core thesis focused.  They want to lend on good real estate and to lend to experienced sponsors and companies.

As you can see, these are some of the types of debt products that you can use to acquire multifamily apartment community investments.  There are others but this list summarizes the majority of products used in the marketplace.

In another article in our library, we discussed debt financing.  In this article we will discuss equity financing and how it affects you as an investor.

When making an investment, you want to know how you are going to acquire assets from 0 percent to 100 percent financing if you are not paying all cash.  Most multifamily and apartment community investments utilize debt financing and equity financing.  The other percentage that would be used to acquire an asset that is not debt, would be equity or cash.  Given that you are purchasing businesses, you are in most cases raising money to buy these businesses. This is why we reference equity because an investor is buying a stock. In our article regarding debt, debt was described as a bond.

Given that you are purchasing businesses, you are in most cases raising money to buy these businesses. This is why we reference equity because an investor is buying a stock. In our article regarding debt, debt was described as a bond.

In this case, since the investor is buying the equity, the investor would be buying a stock or an ownership interest. The investors ownership interest, given that it’s equity, is based on the performance of the asset, where a bond would be based on a fixed interest rate. If something happens to the property investment and it doesn't go well, the investors ownership is backed by the bond or the debt instrument. Equity investors prefer higher risk that result in a higher reward or yield.

Rather than having a low yield fixed rate debt obligation, they want a percentage return, but also want to have a larger percentage return on their investment as a multiple growth.  The investor is investing in the potential upside in the deal and therefore taking the risk that the deal may or may not go as planned.

Let’s breakdown the most common types of equity.  Though there are others, this article will reference the most common as it relates to commercial real estate and multifamily apartment community investing.

First, there is private equity or private partnerships investors can pursue via private placements.  In multifamily apartment investing, these are normally referred to as syndications. In a syndication, a general partner forms a private investment vehicle via a private placement.  The general partner would then market to investors to raise capital for the single property investment project.

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Section 506 of the SEC’s Jobs act regulates these investments.  In a 506b, general partners may NOT publicly solicit for investors and may have up to 35 non accredited investors.¹  In a 506c, general partners MAY publicly solicit for investors and may only include accredited investors in the investment.²  An accredited investor is someone who’s net worth is $1 million, excluding their primary residence either individually or with a spouse or partner and or someone who’s income exceeds $200,000 individually or $300,000 with a spouse or partner for the previous two years. ³

An accredited investor is someone who’s net worth is $1 million, excluding their primary residence either individually or with a spouse or partner and or someone who’s income exceeds $200,000 individually or $300,000 with a spouse or partner for the previous two years.

Next, there is public equity, which would be publicly traded stocks, and as it relates to real estate you have REITs (Real Estate Investment Trusts). As an investor you can invest in a REIT which purchases commercial real estate

There is also Joint Venture equity. For JV equity, you would find a private equity firm, which could be a family office, or some type of investment company that has discretionary capital that wants to invest in multifamily apartment communities. You would form a joint venture with them. They would in turn write you a single check and you would purchase the property.

There is another type of equity called pref equity, which sits in between the debt and the cash that you would be bringing to the table as the general partner. Pref equity interest rates are higher than common equity, and in most cases, the pref equity does not participate in the upside of the project.

There is another type of equity called pref equity, which sits in between the debt and the cash that you would be bringing to the table as the general partner. Pref equity interest rates are higher than common equity, and in most cases, the pref equity does not participate in the upside of the project.

Another type of equity investment could be a fund. The fund would be outlining the type of assets they want to invest in, whether its value-add, core or opportunistic. The fund would then reach out to its investor pool with a goal to raise $20 million, as an example. Once the investor from the pool signs the private placement memorandum they are committed, and the fund will start seeking deals. General partners and firms like the fund model so that they know they have the capital on hand rather than having to raise money on every single deal on a single basis, ie. syndication.

Now let's discuss the yield associated with these types of equity structures.

The yields associated that most investors would expect, are called a preferred return. There would be some type of profit split. Profit splits are based on a few different measurements.  Examples of those measurements are Internal Rate of Return (IRR) and Equity Multiple. An IRR hurdle is a time value of money calculation and is the discount rate of future cashflows. An Equity Multiple is the percentage multiple on your invested dollar. If you invest one dollar, and then you receive two back, that's a 2x Multiple on your initial investment.

An Equity Multiple is the percentage multiple on your invested dollar. If you invest one dollar, and then you receive two back, that's a 2x Multiple on your initial investment.

A preferred return is a year over year dividend that you expect on your investment.  It’s the incentive the general partner is willing to provide to attract investors to invest in a project. As an example, a preferred return can be 8 percent. You’ll receive an 8 percent preferred return on your capital and also a profit split (promote). The general partner gets promoted to their profit split if they follow the business plan. If they follow the business plan correctly, the split would be 70 percent to the investor and 30 percent to the general partner. So as an investor, you would get an 8 percent preferred return year over year on your investment, and 70 percent of the upside, or profit, in the investment when the property investment business plan is completed and sold.

Most of these equity investments, JV equity, preferred equity, a fund, a syndication single, private capital raise all have these general yield parameters associated. We will dive further into the formulas and calculations, as well as the percentage return expectations in other articles within our library.  

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^{1 - “Private Placements - Rule 506(b),” SEC Emblem, May 4, 2017, https://www.sec.gov/education/smallbusiness/exemptofferings/rule506b}

^{2 - “General Solicitation - Rule 506(c),” SEC Emblem, May 4, 2017, https://www.sec.gov/education/smallbusiness/exemptofferings/rule506c#:~:text=Rule%20506(c)%20permits%20issuers,in%20Regulation%20D%20are%20satisfied}

^{3 - “Accredited Investor,” SEC Emblem, March 26, 2022, https://www.sec.gov/education/capitalraising/building-blocks/accredited-investor}

When buying and or investing in an apartment community, you are investing in a rental real estate business. Don't forget that you're buying a business first and a property second. You need to know what similar businesses, or in this case, apartment communities, are trading for in the current market conditions.

Determining multifamily sales comps are different from single family because there is a finite amount of multifamily asset trades year over year.

In single family, it seems there are an infinite amount of sales in North Texas.  For example, there are over 100,000 homes sold per year on average, and only 300 multifamily apartment communities sold on average per year. This means that the sales data for comparable multifamily sales is even more paramount when finding the assets value.

How do we establish the value of an asset using sales comparables?

First, you want to use the macro factors most firms use to make an initial determination of value. The macro factors include:

• The capitalization rates at current market value

• The location or submarket that the property and asset is located

• The vintage, or the age, of the asset and how it compares to other sales in the submarket

• The style of the investment - Core, Value-Add or Opportunistic?

• Price per unit based on the vintage

• Price per square foot based on the vintage

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Next, you'll get more granular using detailed physical characteristics. These will include the following:

‍Interior Finish Outs of the Units

Are the interior finish outs dated for the current interior design trends of the time, or are they updated for the current timeframe? If they are dated, do they need updating and to what level of renovation do they need?

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Capital Expenditure

How much will you have to spend or invest from a capital expenditure perspective on renovations and asset repositioning?

Amenities

You will also use the property and asset amenities, such as parking. Is there a parking garage? If no garage, is there covered parking? Does the community have a gym? Are there pools, pet parks? Is the community gated, etc.  

Location

You will also review the location. How are the schools? What’s the median income? Is the neighborhood safe? Is there crime?  

Financial Performance

You’ll use the financial performance of the asset utilizing a rent roll, the financial statements, and their information. You’ll also need to understand if the property is currently stabilized and operating efficiently, or is the property distressed in some form or fashion. Most assets trade on a future value. This means they trade on a small to large premium to market comparables based on the financial performance of the asset.

These above are all additional, more detailed factors that you would use to compare your asset to the previous sales comps in the market.

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A few resources to utilize to aid you in sourcing sales comps, among others, can be the following:

Real Estate Investment Sales Firms

The firms that specialize in multifamily investment sales should have very detailed data on all former and previous sales comparables in the market.

Appraisal firms

Appraisal firms that specialize in assisting these real estate investment sales firms and lenders in appraising property value. They are a tremendous resource to help you determine current and previous sales comparables.

The reason the investment sales firms and the appraisers are so important is because there is no regulated commercial real estate MLS like there is in single family real estate.

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Some software that many professionals use to determine sales comparables are the following:

Yardi

Yardi is a national robust management software property management software. They aggregate a tremendous amount of information from rental rates to sales comps to macro market trends, including income growth, et cetera.

Costar

Costar is the unregulated MLS is an enormous data aggregation tool. They don't just utilize multifamily. They also do other commercial real estate product types.

Axiometrics

Axiometrics is owned by Real Page. They are a property management software and data provider. They provide rents comps, sales comps, and macro and micro market data trends.

It is best to keep a database of past sales comps that you can easily refer to as the market moves forward and new properties trade. This data will allow you to become very tuned into the slightest changes in the market.

In this article we will unpack what a rent comparable is and why it matters to you as an investor. A rent comparable or rent comp, as referred to in the industry, would be another property of similar vintage in the submarket that your subject property investment is in that you would compare to your property to find your market rental rates.

A rent comparable or rent comp, as referred to in the industry, would be another property of similar vintage in the submarket that your subject property investment is in that you would compare to your property to find your market rental rates.

This is a rental real estate business, and rent comps are created based on several metrics.  One of the metrics is the size or square footage of the apartment units, for an apartment community. The floor plan is also used as a metric. The floor plan would include how many bedrooms and bathrooms are in an apartment unit. Most apartments are one bedroom, one bathroom, two bedrooms, two baths, three bedrooms, three baths. Very rarely is there a four bedroom, though you will see four bedrooms, four bath apartment units in student housing developments.

At APTVEST, we approach our market rent for an apartment community based on comparable properties in the submarket that are similar vintage. We look at their finish outs and the amenities at the community. We can then price our apartment community unit rent in comparison. Your submarket research should answer questions like - is your investment property inferior or superior to the rent comparable? What is your competitive advantage as it relates to the other rent comparables in the submarket that you own and manage the apartment community you are investing in?

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Additional factors to consider in rent comps include the physical attributes of the property.  Factors such as: does the community have a pitched roof? Is the roof flat? Are there individual mechanical systems like HVAC units, individual hot water heaters? Are there washer dryer connections in the units, or is there a laundry facility on site? Is the façade brick or stucco?  Is the façade vinyl or wood siding?

Rent comps also consider the finish outs of the interiors of the units.

• What do the surface of the countertops look like, and what material are they?
• What is the condition of the floors, and what material are they, and how do they look?
• What color are the walls painted?
• What do the fixtures look like?
• Fixtures being ceiling fans, cabinet fixtures, faucets, doorknobs etc.
• Are the fixtures dated?  What color and age are the appliances?
• Are they white? Are they cream? Are they black?
• Are the appliances high end stainless steel?
• Are the cabinet doors original?
• Are they updated cabinet doors and interior finish outs for the interior design trends of the year of acquisition?

Additionally, what does the bathroom, including the tile tub surround look like?  The fixtures, the countertops, also. Additionally, does the unit have washer dryer connections in the unit?  All these factors go into play when you are comparing other properties to your property and investment to find your market rental rates.

You can create value at a property by making updates to the interiors of the units. You can also complete updates to the exterior of the community and add amenities. You can operate the rental real estate business effectively and try to be superior to other rental comps in the area.  By doing so, you would drive rental traffic and residents to want to live at your community as opposed to the submarket competitors.

Other rent comparable factors also include community amenities.

• Is the community is gated?
• What is the parking like, and is there reserved parking?
• Is there covered parking?
• Is there ample parking, or is it tight?
• Is there a gym? Is there a pool?
• Is there a package centers for services like Amazon?
• Are there yards on ground floor levels for pets, or anything to give the resident a little green space?
• Are there pet parks?
• Additionally, where's the location?
• How are the schools?
• How are the retailers, like Walmart, or the restaurants in the area?
• Is the area more urban or suburban?

All of the above are the factors that are used when determining the market rental rate per square foot at an investment property compared to others in the submarket. The goal is to create value at the property by having the best quality interiors and best amenities, and the best price as it relates to other rent comps in the area.

The goal is to create value at the property by having the best quality interiors and best amenities, and the best price as it relates to other rent comps in the area.

Now, there are several resources and software that you as an investor can utilize to obtain rental rate comparables in the submarket where your property investment is located. The following are three inexpensive options. The first, and one of the main resources available, would be apartments.com. It's a free resource, though you can pay to have an upgraded subscription. Another resource that a lot of professionals use is apartmentdata.com. Lastly, another resource is ALN data. These will help you determine most rental rates in most submarkets and their data is accurate most of the time.

More expensive and more professional robust software is also available. One example is Yardi. Yardi is a property management software platform, and they aggregate a tremendous amount of data nationally for a lot of large ownership companies and investors. They have real time data at their fingertips. It is pricey but that's what we at APTVEST use, and it's fantastic. There's another platform called Costar.

Costar is not just for apartment communities. It is also for other CRE product types. They are the unregulated MLS, as it relates to commercial real estate. They have a lot of aggregated data and it's pricey. Another platform is Axiometrics and it’s owned by Real Page. Axiometrics’ data is excellent as well. These platforms don't just have rent comps, they have sale comps, market data, ownership information and macro market data as well to assist in your research for creating rent comps.

We hope this article has been beneficial in unpacking how to pursue finding rental comparables for your investment property.  We have many other resources available via our weekly market updates.

Investment sales firms are real estate firms that help investors and companies buy and sell real estate. They are different than single family real estate firms. Single family real estate firms deal with an individual that is buying a residence as their home.

Real estate investment sales firms are real estate brokerage firms that advise companies and investors on the acquisition and disposition of commercial real estate.

In this case, as it pertains to you and us at APTVEST, the commercial real estate product is apartment communities.  The communities these firms sell can range from five-unit small communities up to 1000 plus unit larger multifamily communities. There are a handful of firms because this is a very competitive business. These firms are similar to Wall Street brokerages and investment firms helping an investor, like you, buy and sell a business.

In other articles in our library, we’ve discussed when buying and selling a multifamily asset, you're buying and selling a business.  The business just happens to be a piece of real estate. It is a rental real estate business.

These real estate investment sales firms have real estate brokerage licenses in the state they are located. The firms hire real estate agents, who can become brokers to represent buyers and sellers of multifamily apartment communities.  

The brokerage firms can be few and far between as it relates to the brand and the style of what they do. Specific to multifamily and apartment communities, here are a list of the larger firms that are national and international. The largest commercial real estate investment advisory firm on the planet is CBRE.  They are publicly traded and provide investment sales services along with many other services.

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The next one is JLL or Jones Lang LaSalle. There's another called Marcus & Millichap. Marcus & Millichap strictly specialize in investment sales. They do not work on leasing or have leasing agents. They don't buy and sell their own properties. They're solely focused on advising clients to buy and sell commercial real estate. There is a company called Moran and Company, which is a regional firm.  Most of the firms mentioned specialize in leasing as well as in marketing and management.

Several of these larger firms own their own properties and then lease them out to tenants on the commercial side. They also have a division that is geared towards multifamily assets and apartment communities. Other large firms are Cushman and Wakefield, and Newmark. You may also find a local brokerage firm within your local market that may be just in your market and not in other markets.

Several of these larger firms own their own properties and then lease them out to tenants on the commercial side.

Notice that Keller Williams, REMAX etc. aren’t mentioned. Those firms do have commercial arms, but they strictly tend to focus on residential real estate buying and selling. The other firms listed above strictly focus on commercial real estate. You will not see CBRE in the marketplace representing individuals as a home buyer to buy a house. That is not something that they do for investors.

They want to focus on larger properties ranging from five million up to hundreds of millions of dollars.  They advise businesses, companies, clients, one off investors, etc. on how to buy and sell commercial real estate. Because of this, they are not referred to as real estate brokers, they are real estate investment sales firms.  They work with investors because the investor is investing in businesses that are rental real estate.

Here is a list of the top National Investment Sales Firms for Multifamily by Volume:

• Marcus & Millichap
• Newmark
• Northmarq
• Berkadia
• CBRE
• Cushman & Wakefield
• SVN International Corp. (Sperry Van Ness)
• JLL

Source: the Editors of Multi-Housing News. (2023, June 14). 15 Top Multifamily Brokerage Firms of 2023. Multi-Housing News. https://www.multihousingnews.com/15-top-multifamily-brokerage-firms-of-2023/

As you can see, the investment sales business is very competitive.  Investments sales firms provide more than just brokerage services.  They advise investors on macro and micro market trends and should be a resource all investors and firms use to stay current on apartment market trends.

We have many other resources available via our weekly market updates.

The first most common benchmark yield is a capitalization rate or cap rate. The cap rate is the yield on the investment if you were to pay all cash on the purchase of the property.  Note that approximately less than 5 percent of firms pay cash for commercial investment properties. This is a leveraged, or financed, business so the capitalization rate becomes another comparable metric on where assets are trading in the marketplace. If you were to ask a broker, “what's the cap rate?” their answer would be based on if you were to pay all cash. But again, in most cases, you're not paying all cash, so the cap rate becomes just like a price per unit metric comparable, rent comparable etc. It is just another metric to understand what the risk level is on the investment.

The higher the risk of the investment property, the higher the cap rate, the lower the risk the lower the cap rate.

This is because, again, if you were to pay all cash on purchase, and it's a riskier deal, you want a higher return. If it's a lower risk deal, you can expect a lower return on your investment or a lower cap rate.

Though there are many return types and expectations for partnerships on multifamily and apartment community investing to consider, this article will consist of four main categories that investors review.  Those four are internal rate of return, or IRR, Cash on cash return, the equity multiple, and the return on cost.

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First, Internal Rate of Return, or IRR is the most complicated, and is a very complex financial formula.  It is a time value of money calculation. Most real estate investors use it. If you were to invest in an opportunistic deal, and your IRR was a 25, or you were to invest in a value-add deal, and your IRR was an 18, you would have to make the decision based on your specific risk tolerance:

What IRR do you want? Do you want cash flow each year and a lower risk? Go with the value-add deal.
If you have a high-risk tolerance, and you don't need any cash flow, but you want a large multiple on your investment, you'd go with the opportunistic property in this example.

Next, Cash on cash, is the yield on the investment of the cash that you invest. So, if you’re getting a preferred return, as we've discussed, preferred return may be 8 percent year over year, and that would be cash on cash that you’re getting. Now, if it's not being paid current and the property is not producing cash flow, your cash on cash may actually be 2,3, 5 percent out of the gate and ultimately you hope it grows to that 8 percent to 10 percent. So, on an average basis, you may end up with an 8 percent cash on cash. For example, if you invest $1 million in a deal and your cash flow is $100,000, then you'd be making 10 percent cash on cash on the deal. Simple example.

Next, Equity multiple is if you give me $1 and the deal is operated for three years, and after three years I give you back $2, you would have a 2x equity multiple or two times on your investment. You would then calculate IRR and cash on cash and return on costs and other metrics based on the time of the investment. In this case, it's three years. So, there's a couple of calculations and most general partner, sponsors and investment firms will break all this down. Post disposition, most firms will then send out performance metrics on this specific deal and investment.

Lastly, return on cost is another comparable to use when analyzing different investment opportunities. Investors like return on cost because it is the yield on dollars invested in the deal If you were to pay all cash.  Similar to a Cap Rate but includes capital expenditures (renovations) dollars invested.  It’s the potential future yield. The calculation is the future NOI in the expected disposition year divided by the purchase price plus capital expenditure (renovations).  This would give you the potential yield if you were to pay all cash or return on cost of the project.  

In summary, there are many ways for you to analyze apartment community investments.

In our opinion, these are the four main return metrics that you as an investor should be considering, to pursue apartment community investment as it relates to investment yields and expectations - cash on cash return, return on cost, internal rate of return, equity multiple.

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