In this episode, I dive deep into the most important metric to analyze when underwriting multifamily real estate deals. Whether you're an LP looking to invest in another investor's deal or a sponsor's deal, or an active investor screening deals, understanding this metric is crucial in determining if a deal makes sense in today's market.
The metric I'm talking about is stabilized yield on cost. I've discussed it before on the podcast, but I wanted to revisit it because of its significance. Stabilized yield on cost provides a view of how a deal is going to perform independently of what's going on in the capital markets. It allows us to accurately project the potential of a multifamily investment.
Unlike other metrics, such as IRR, which rely on projections of future cap rates, stabilized yield on cost focuses on the ongoing cash flow and compares it to the cost of capital. By understanding this metric, you can quickly determine if a deal offers positive or negative leverage and if it aligns with your investment goals.
In this episode we discuss:
- What is the most important metric to analyze when underwriting multifamily real estate deals?
- Why is stabilized yield on cost a crucial metric to track in multifamily investing?
- How does stabilized yield on cost differ from metrics like cash on cash return and IRR?
- How can stabilized yield on cost help determine the strength of a deal and create value in today's market environment?
- How can the risk profile of a deal impact the acceptable spread between stabilized yield on cost and market cap rate?
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