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As we turn our focus to 2025, we are excited about the opportunities ahead. Our acquisition goal is to acquire $250 million in multifamily properties across Dallas-Fort Worth, Houston, and San Antonio. In doing so, we are committed to maintaining disciplined growth by focusing on a maximum of six deals per year, each with a minimum deal size of $40M so we can focus on quality over quantity. This approach ensures we continue to scale at a sustainable pace while delivering on our projected returns and providing an exceptional investor experience.
A golfer’s yardage book is a miniature masterpiece—hand‑drawn contours, wind arrows, and distance markers that reduce uncertainty when the pressure mounts. Underwriting performs the same role for a multifamily acquisition.
Since inception, Lone Star Capital has acquired $514M in multifamily properties in Texas. The portfolio currently consists of 3,609 units across 17 properties. While our property operations have been generally positive, we have observed a slowdown in rent growth and an increase in vacancy across our portfolio.
This methodology is one of the more interesting ways of examining risk/return throughout a capital stack. Modeling subordinate debt and/or preferred equity structures can help reveal the optimal capital structure for a given deal and also shed light on the appropriate return for a particular position in the capital stack.
Some risks are binary while others are not. Binary risks are ones in which a situation really only has two outcomes, success or failure.
The active versus passive discussion creates a fork in the road for people and requires soul searching in order to become set on a certain path. Many blogs will imbue its readers to leave their boring day jobs to go out and amass a huge portfolio of real estate, while others will convince you that managing your own investments is so much trouble that you should just simply invest with the author.
A recent trend in multifamily syndication is to offer investors a dual-tranche equity structure, a preferred equity piece and subordinate common equity. The preferred equity tranche is senior to the common equity and earns a fixed rate of return (typically 10%).
If a pessimist were to truly underwrite conservatively, how could he or she ever end up being the highest bidder for an asset he or she clearly isn’t optimistic about? Anyway, I’m glad to tell you that my goal today is not to prove to you that my underwriting is conservative (although it is ;)) but rather that my underwriting model itself is conservative.
Limited and full recourse triggers can appear daunting to be sure but they are primarily used as a negotiating tactic by lenders as a way to give them a strong lever to ensure borrower compliance. From my research I have learned that most lenders have no interest in actually utilizing the recourse remedy but they will as a tool of last resort.
When putting together an underwriting model for a multifamily investment, there exists a delicate balance between aggressiveness and margin for error.
Beware of promises of success based on macro forecasts and secular demographic trends as well as vanilla value-add stories. The data does not support the claim that trends like “America is becoming a renter nation so there is increasing demand for apartments” and other macro trends truly increase cash flows in the near term.
Today, high quality output is easier to achieve yet it is now harder to stand out since everyone can perform at a similarly high level, thus increasing the importance of sales, marketing, and personality.
Self-directed IRAs offering non-traditional investments have increased in popularity in recent years and are somewhat more accessible for investors compared to in 1974 when the IRA was first introduced. Self-directed IRAs allow you to invest in real estate, precious metals, notes, tax lien certificates, private placements and more.
In a tertiary market, if your growth and valuation assumptions are wrong, you still earned the bulk of your returns from dependable cash flows. In contrast, in a growth market where cap rates are very low, if growth doesn’t occur as expected and cap rates widen, there will not be much left in terms of positive returns.
I’ve been joking for a few years now that every deal brought to market is a “value-add”. Even properties that perform well – with high occupancy and no deferred maintenance – are advertised as “value-add” opportunities: of course, you can always renovate and raise rents.
Although refinances are best avoided in underwriting projections, it is nonetheless still critical to perform exit tests and stress the possibility of refinancing out of the bridge loan at maturity. This can be done by stressing the property’s revenue while also raising the exit cap and interest rate to see if the projected take-out loan still has proceeds sufficient to pay off the existing bridge.
When I say, “you’ve been promoted”, I’m not talking about the corner office. A promote, or carried interest, in joint venture structures, is a way that investments’ sponsors receive a disproportionate share of the profits, usually subordinate to a preferred return or hurdle rate.
Amidst the recent turmoil, a frequent refrain from multifamily boosters is that volatility in publicly-traded stocks is a signal to move into private assets like real estate syndications.
As an investor, however, do you want your sponsor to be making distributions right now? Even if they pre-raised substantial reserves, should they continue to make distributions as our economy nose dives into a recession? And does having such large reserves from day one drag on total returns, perhaps even offsetting any benefits of continuing to receive distributions when most others are not? These are difficult questions that I hope to answer shortly by analyzing a few different scenarios in a spreadsheet.
A Preferred return, or “pref”, is usually based on levered cash flow; more debt => higher cash flows => higher promote for the sponsor. This means that debt-averse investors may struggle to find deals which are leveraged to their liking, or find themselves in deals where supplemental financing added two to five years after acquisition leads to significant return of capital.
The market today is quite uncertain, which is the definition of risk – more outcomes can happen than will happen. Starting in March, many investors put a pause on entertaining new opportunities, the idea being that it was better to wait and see things play out than to jump into opportunities at “pre-COVID” prices.
An even better way to illustrate the importance of taking risk into account and how lower returns can actually be superior is to compare preferred equity and common equity investments.
To recap, the purpose of underwriting preferred equity investments is to qualify the merit of the investment generally via our standard underwriting practices and to appropriately size and price the preferred equity investment based on the deal profile and risks.
Preferred equity is a powerful source of capital for sponsors looking to maximize returns and get more deals done.
Since the onset of the COVID-19 pandemic, the real estate capital markets have experienced significant headwinds and changes.
Are you underwriting deals but none of them seem to make sense? It doesn’t mean you’re too conservative, it just means you haven’t uncovered these magical, behind-the-scenes, ways to boost your numbers while making it look effortless. Every deal you underwrite from now on will look like a home run.
Quarterly reporting for real estate investments is a form of investor communication that is focused on financial performance, distributions, and business plan progress.
The final but potentially most important point about fixed rate versus floating rate loans are the prepayment penalties associated with each type of loan.
An interesting distinction between value-add and core-plus investments is the key skill set for each strategy.
A preferred return is a common feature of a real estate partnership structure whereby an investor's return is put in first priority prior to any sponsor/manager participation in the profits or performance compensation.
In this article, Ian addresses a classic issue with many investment theses, which is that many are happy to pay too much for an investment because the future growth prospects look so good that it may be able to make up for the steep price paid today.
The exit test is most useful for shorter term investments focused on value creation, especially if they are financed with a bridge loan
The purpose of an OM is to provide detailed information to prospective buyers about the property, location, and market.
A promote crystallization is a provision in a joint venture agreement whereby the sponsor can capitalize on the value created that corresponds to their promote if the partnership were to sell.
Property taxes, specifically in a high property tax state such as Texas, can make or break your deal
Secret #1: You can get an agency loan for your first multifamily deal: Although agency lenders are typically looking for 2 years of multifamily ownership experience in the market you’re looking to acquire the property, they are often more flexible on this requirement in practice.
Another one of Rob’s core values is his passion for teaching. As Rob began to notice the tremendous demand for his skills in evaluating risk and opportunity, he decided it would be his mission to codify his process and theories into an easily digestible book, which was recently released as, The Definitive Guide to Underwriting Multifamily Acquisitions.
In this article, I want to attempt to share all the different ways we price assets based on the various deal profiles, financing scenarios, and return metrics.
Synergies are a cliché in the M&A space. Throughout Warren Buffet’s annual letters to Berkshire shareholders, he often denounces the purported benefits of synergies associated with an acquisition or a merger.
The acquisition process is the lifeblood of any real estate or private equity business. Maintaining a robust acquisition pipeline provides imperative market knowledge, identifies superior opportunities which aids capital raising efforts, and allows a business to scale faster.
The more deals a sponsor does, the higher likelihood that they are going to have to make an unanticipated capital call for one of their properties.
A major goal for 2021 was for Lone Star to launch its in-house property management company, Radiance Living. We successfully launched Radiance Living in August and, due to our strong preparation, the transition of our portfolio to Radiance was seamless.
Regardless of the deal type, providing detailed and transparent reporting is the best way to provide comfort for investors over the long run.
The first major point is about focus. Lone Star launched Radiance Living in August 2021, a Houston-based multifamily property management company. Radiance Living only manages property in Lone Star’s portfolio. We don’t take on any 3rd party. Management business. This allows our management team to focus solely on our own assets, making the success of Lone Star’s investments priority number one.
The dual tranche equity structure on the other hand utilizes a senior/subordinate structure to reallocate risk/returns to various investment members. In this structure, Class A investors are owed a fixed rate of return (typically 9% or 10%) which is paid out before Class B members receive any distributions.
Many lenders have become far more flexible on their interest rate cap requirements, yet some are still demanding onerous terms. These differences can actually make or break the decision of going with one lender or another. One simple way to avoid all of this is by using fixed rate debt (you don’t need a cap if your interest rate is not floating).
Multifamily real estate is a powerful investment that has proven itself to be capable of both high returns and to be safe in difficult times.
A 1031 exchange is a major tax benefit associated with real estate ownership, which allows the deferral of capital gains by exchanging the gain into a like-kind property upon sale rather than receiving all the sale proceeds in taxable cash.
Undoubtedly, we have been in a low return world for quite some time. More specifically, yields have become increasingly smaller which has led to higher valuations. To exacerbate the situation, risk-free or benchmark rates (10-year treasury yield) are near historical lows and the cap rate spreads above these already low yields, have shrunk significantly.
In this article, I’d like to discuss another often-feared topic, floating rate debt. In 2018, just like bridge loans, floating rate debt was considered cursed by many multifamily investors.
A common theme in the multifamily world over the last few years has been an aversion to bridge loans. As interest rates began to rise quickly in 2018, many investors ran from bridge loans and other floating rate debt instruments because they thought interest rates would continue to rise, which would lower the cash flow of investments as well as potentially cause a recession
The solution to investing near cyclical highs is focusing on less cyclical assets such as multifamily, evaluate opportunities based on cash flow, not revenue growth or market appreciation, avoiding short-term business plans and short-term debt, and fixing debt payments.
In these memos, Marks’ asks you to think deeper about second order effects of actions relating to the market and other topics such as internal rate of return and taxes
Many of the syndicated multifamily investments I come across pre-raise the full capital expenditures budget either through equity or through a lender-financed budget.
Underwriting is one of the most important aspects of multifamily investing.
I subscribe to the weekend digest of the National Real Estate Investor which gives me the opportunity to read the week’s most attention-grabbing articles over the weekend.
Pricing and performance are just as important as rating and quality.
A fresh podcast concept brought to you by Craig McGrouther and Rob Beardsley. We are excited about this new format, which allows us to explore real estate and various other topics in greater depth, with extended episodes.
A class C multifamily property in Lubbock, Texas, presented a compelling value-add opportunity for Lone Star Capital
Economic and tax implications of a property refinance.
While there are infinite ways to structure a deal, the most typical way is with a preferred return and a promote structure, also known as a waterfall.
How Lone Star thinks about acquisition volume targets
The impact of penalties on loan options and business plans.
