How We De-Risk Our Real Estate Deals
At Cloud Capital, our number one priority is capital preservation. Once we feel that there is an extremely high probability of our investor’s capital being protected in the deal, we then shift our focus toward identifying the key drivers that will generate an attractive return on invested capital.
Investment involves risk. If investment involves risk, and our core value is capital preservation, then the question becomes how can we as a sponsor and fiduciary of our investors capital De-Risk our deals?
But what does a good deal look like on the surface? How do they underwrite and model out in our proprietary model? Do good deals posses the same characteristics over and over? If so, what are the commonalities and more importantly…How did we develop a process that is repeatable?
Cloud Capital strives to acquire Multifamily and Assisted Living Communities for our investors in top-tier submarkets that are underperforming. The process of acquiring these coveted deals is ultimately how we make outsized returns for our investors.
By implementing a strategic value-add business plan along with the appreciation factor from owning in a great location. This combination of both strategic plus organic growth can yield a phenomenal return on invested capital.
Strategic Plan + Cashflow + Appreciation = Superior Risk-Adjusted Returns
1. Market Selection
- Pro-Business Climates:
- Favorable Landlord-Tenant Laws
- Nation-leading Job Growth
- Strong Net Migration
- High Median Incomes
- Affordable Cost of Living
- Diverse Employer Base
Once we have identified our target MSA’s, we then drill down to the top-performing submarkets
2. Submarket Selection
- Median Incomes > $45,000 – Will our tenants be able to afford rent increases? Affluent tenant base? Will our downside be protected by a high-quality tenant?
- Crime – We will never go searching for yield in a high crime area.
- School Ratings – School ranking vs the city? State? If our property has a high concentration of 3 bedroom’s we are very strict on school ratings.
- Drive-by Traffic – 5 minutes from the nearest interstate? Daily drive-by traffic? Road Visibility?
- New Development – New construction within a 2-mile radius? Probability of the path of progress extending here? Who are the developers? Are they well known?
- Supply/demand Imbalance – We need to see demand in the form of high occupancy, organic submarket rent growth, and low amounts of new construction. What apartments will be our biggest competitors?
Following our submarket analysis, we then drill down to the specifics of the deal.
3. Deal Specific
- Current Ownership – Is current ownership sophisticated? How many units do they own? Out of state? Who is on their team? Are they self-managing this deal? Can we take advantage of operational efficiencies?
- Current Property Manager – Best in class? What feedback have we heard from other owners? Can our property manager identify obvious improvements upon takeover?
- Rent Comps – Below market rents? Price per sq. ft vs submarket? Are the 1 bedrooms lagging or the 2 bedrooms? Why is that?
- Sales Comps – In line with other properties trading in the submarket or is this trading at a discount/premium? Why?
- Meat Left on the Bone – Is the renovated unit total < 30%? To unlock value, we need to be able to renovate the majority of the units and achieve massive rent increases.
- Economic Vacancy (loss to lease, vacancy, bad debt, concessions) – Is this property experiencing high vacancy and delinquency? Why is that? How does this relate to the submarket average? Is this an opportunity (great submarket being run into the ground) or a red flag (lower socioeconomic submarket with a lower probability of turning around)?
- Additional income < 8% – We breakdown every income line item to determine if we can implement additional revenue streams.
- Operating Expense Ratio – Is the property running efficiently? Is there a clear path toward improvement? What line items can we improve upon acquisition? Can I property manager confirm?
- Who will be our buyer upon exit? Will this deal attract institutional capital or other syndicators with less sophistication but higher return targets?
Real Estate is simple but that does not mean easy.
We create profits for our investors by either increasing income (increasing rent on our 2 bedrooms from $950 to $1,025) or decreasing expenses (lowering our marketing budget from $30,000 to $20,000).
Ideally, the property is currently leasing for $0.96 but the submarket average for comparable assets is $1.16. We will arbitrage that spread and our investors will reap the rewards.
We are grateful and appreciate the confidence you have placed in Cloud Capital as sponsors and stewards of your capital. You, our investor-partners, are our most important competitive advantage.