Our journey to the closing table begins with a simple goal: to make a profitable, cash-flowing investment in a multifamily real estate asset. To achieve that goal we must first collect, collate, and analyze a tremendous amount of disparate and noisy deal-related data points, which are never at our fingertips and not always accurate or factual. In the infancy of each deal, and through the due diligence process, it is our job to find the useful information and then apply careful analysis before making an investment decision. This ‘pre-investment’ stage of a deal attempts to build a bridge from the past to the future and is where the paths of anthropology and real estate investing merge.
I first learned about Anthropology through my uncle, Roy Rappaport, a distinguished Anthropologist tenured at the University of Michigan. He encouraged me to take courses in that subject, which I did, during my own time in Ann Arbor. The overall coursework was based on the methodologies of Cultural Anthropology, a systematic study of human societies, cultures, and their development. As a student you learn by reading various case studies (aka ‘ethnographs’), and the analyses and interpretations of them. Case studies are written by an ethnographer who has observed a particular society from the point of view of the subject(s) of the study. Completion of the case study requires total immersion by the ethnographer into that society for research, interviews, and surveys. This immersive fieldwork is an essential element to a meaningful and successful ethnography. This modus operandi of the ethnographer, to gain a thorough and objective understanding of the facts, is the same one Colony Hills Capital applies to a deal from the pipeline stage to the end of due diligence. This bottom-line understanding of the facts surrounding an acquisition candidate is critical in determining our ability to increase cash flow from the property, and ultimately the keystone to building a solid foundation for a successful real estate investment.
The lifeblood of any investment manager is a healthy investment pipeline. A crucial part of our process is developing and nurturing a diverse and expansive nationwide sourcing network consisting of operators, lenders, third-party providers, brokers, and ‘bird dogs’, who provide a steady supply of off-market investment opportunities. There are always many deals to choose from so for each one we create an opportunity profile to determine whether it can satisfy our performance targets. We begin to establish the profile by asking questions, including: Who is the seller? What is their motivation for selling? How did they come into owning this asset? How long have they owned it? How is the asset performing? How is the market around this asset performing?
We further evaluate other potential factors such as a loan maturity, retirement issues, ownership dispute, macro/micro market call, fund maturity, a default or foreclosure, that might be motivating the seller’s decision to sell and whether the asset is positioned in a way that will suit our investment parameters. We also qualify the seller to make sure they have realistic price expectations and are ready to transact. Once we determine that we have an attractive opportunity, we perform a desktop analysis of the asset by accessing additional data relative to the location, submarket, demographics, and the local economy. In short order we decide whether to move ahead with a site visit as the precursor to an in-depth investment underwriting.
In order to paint a complete picture of the investment opportunity we must immerse ourselves into the asset and the market in which it operates. On-the-ground fieldwork is a critical component to a thorough and proper underwriting of the investment opportunity. My approach to this phase of the work can be summed up by a quote attributed to Studs Terkel, the great American writer, oral historian, and de facto ethnographer, who said about hisinterviewing technique that, “it isn’t an inquisition; it’s an exploration….”. Terkel interviewed people for their stories to gain perspective on life in America, and we, in essence, interview the asset for perspective on its standing within its peer market and submarket. Walking throughout the property, touring the model apartment, talking to staff and residents, competitors and neighbors is all part of the property interview process. By doing this we create a property profile, which details the qualitative and quantitative factors of the asset, puts detailed perspective on current operations, and helps frame the future business plan.
Throughout this phase of our process we are always looking for current operational deficiencies that if changed will lead to increased cash flows when we own the asset. We look for poor marketing situations like bad curb appeal, inadequate signage, poorly designed leasing collateral, an unattractive model apartment, a bad tour pathway from leasing center to model apartment, a poorly furnished and designed clubhouse, leasing center, and amenity package. Moreover, when we stop in to “shop” these properties our eyes are always on the leasing agents and maintenance staff to see how they perform their jobs. And acting as a potential renter and getting the tour, we get a very good read on the quality of the leasing agents and the maintenance staff’s training, as well as the property
manager’s attention to detail.
Fieldwork also helps determine the extent of deferred maintenance and the capital improvement opportunities that need to be accounted for in the business plan. Left unaddressed, deferred maintenance items snowball into bigger and more expensive issues. It also sends a bad marketing message to current residents, who might be thinking they would rather move to a new community that is better taken care of, rather than renew their lease, thereby leading to excessive turnover and higher operating expenses. The optics of deferred maintenance also affect marketing to leasing prospects, who will notice the maintenance shortfalls as they tour the property, and realize that the current owner is not taking care of the property as well as the competition, which translates to lower prospect closing ratios and higher marketing expenses. Understanding the way in which the property historically has been operated puts perspective on past financial statements and helps inform future budgets.
On the capital improvement analysis, we ask ourselves what is missing or needs replacement within the community and the apartments that will benefit the current residents, so they would be willing to renew their lease at higher rates, and also induce prospects to lease from us rather than a competitive property. Only by doing this fieldwork will we get an understanding of the overall market and what the competitive set of properties are offering. Over the years we have successfully completed millions of dollars’ worth of capital improvements to our communities. We always find ways to improve the look and feel of the property. From refreshing tired apartment interiors, to renovating and refurbishing old clubhouses and leasing centers so they pop with excitement and are more user friendly to our residents, staff, and prospects, to features like security gates, fitness centers, dog parks, playgrounds, and grilling centers, refreshing existing but tired pool areas with beautiful new decking and furniture, and installing Wi-Fi, to create a more beautiful and functional pool area. Improvements could also include paint and trim work, useful signage, landscaping enhancements, and making common areas such as the mailbox center, trash compactor area, and laundry rooms more attractive. These types of enhancements affect all aspects of a property’s daily operations and directly correlate to increased cash flows and positive financial performance.
By use of the same immersive approach an Anthropologist employs to develop and prepare a thesis in preparation for a dissertation, or lecture, or book, we develop our underwriting: the basis of our investment thesis. Through the fieldwork we gain perspective on the past, a panorama of the present, and a pathway to the future. By properly executing this part of our process, we greatly increase our probability of making a successful real estate investment.