We look for properties that will deliver a minimum cash-on-cash return, or yield, of five percent (5%) in year one. We also want the property to generate a minimum annualized rate of return of ten percent (10%) after a hypothetical sale in year ten. Once these core numerical thresholds are met, we look for immediate upside in rents (minimum 5%) and thereafter potential rent growth of at least 3% per year.
The other more qualitative aspects that we look at include whether the investment is really a true “value-add” opportunity where we can bring our repositioning skills to bear. If the asset has already been repositioned by a prior value-add investor and there is little transformative work to do, it is unlikely we would invest because there will not be as much upside in the rents or appreciation to capture in the asset itself. We prefer assets where maintenance and repairs have been deferred by the prior owners, and where rents have not kept pace with the marketplace, because we can then do the hard work to improve the asset which then permits us to raise the rents to market levels. Our typical acquisition is one where the prior owner has lost touch with the day-to-day management of the property, allowing the asset to fall into disrepair and the rents to fall well below market. Such owners tend to bring their assets to market at a discount because they simply want “out”, and these are the acquisition opportunities that we seek.