The Multifamily Wealth Podcast
#197: The Underwriting Metric That Matters Above All Else To Both LPs and GPs
Nov 10, 2023
The podcast dives deep into the crucial underwriting metric of stabilized yield on cost in multifamily real estate deals. It explains its significance, how it differs from other metrics like cash on cash return and IRR, and how it helps determine the strength and value of a deal in today's market. The episode emphasizes the metric's importance for screening deals and suggests moving away from relying solely on deal IRRs.
08:52
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Quick takeaways
- Stabilized yield on cost is a crucial metric to analyze when underwriting multifamily real estate deals, as it provides an independent view of the deal's performance unaffected by market fluctuations.
- Using the metric of stabilized yield on cost is more informative than relying on metrics like cash on cash return or IRR, as it focuses on ongoing cash flow and allows investors to determine if the deal provides value in the current market environment.
Deep dives
The Importance of Stabilized Yield on Cost
In this episode, the speaker emphasizes the significance of analyzing the metric of stabilized yield on cost when evaluating multi-family real estate deals. Stabilized yield on cost measures the expected net operating income (NOI) produced by the property over its hold period, relative to the total investment. It provides a more independent view of the deal's performance, unaffected by fluctuations in the debt market or future cap rates. This metric is crucial for both LPs considering investment opportunities and sponsors evaluating deals, as it helps assess ongoing cash flow, compare costs of capital, and identify potential value creation.
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