(EM, IRR, CoC, and Annualized Return) When I began underwriting, and even many times today, I had to ask my mentor(s) what each of the metrics meant on our underwriting tool. Why were they so excited about cash on cash (CoC) for one deal, but more focused on the equity multiple (EM) on another? Why would they discuss annualized return more often for some equity groups and CoC or EM for others? I still ask a lot of questions about this today even after underwriting $300M+ worth of multifamily (this may seem like a lot to some people, and a tiny amount to others, just the way multifamily investing works). A few things I have found about these deal metrics (and even some other metrics I won't go into on this post, trended and untrended yield on cost (just got taught this one recently)) is the following: 1. They tell slightly different performance and health metrics about a deal 2. They matter more to some sponsors, LPs, and private equity groups than others based on their risk tolerance, desire to redeploy their capital, and expectations for their equity (whether it is from them or the decision makers behind the scenes). 3. They compliment one another. Much like doing your blood work when you go to the doctor. You wouldn’t check your cholesterol only and call it a day. You normally pull a comprehensive blood panel to ensure you’re functioning well from head to toe. For each metric mentioned above I am going to break down what it tells me about a deal, how it is objectively calculated, a quick example, and what people are looking for when this is their key metric. While you read this, if you think of questions that go unanswered please throw them in the comments and I will do my best to answer them or write about them in future posts. 1️⃣ Cash on Cash (CoC): Cash on cash is calculated as annual cash flow: Cash on Cash (%) = (Annual Net Cash Flow / Total Invested Equity) * 100 Example: You invest $1M in a multifamily deal (for the ease of calculation we are going to assume you are the sole investor, and discuss NET cash flow as a 1 time number even though distributions are often paid monthly). Over the first year the NET cash flow is $80k (meaning this amount is freed up to be distributed to investors/yourself, or reinvested into the deal).

Cost Segregation in Multifamily: When It Makes Sense and When It Doesn’t If you buy a $10M apartment building, how much depreciation should you get in year one? For many investors, the answer depends on cost segregation and bonus depreciation. You’ll often hear people say cost segregation creates massive tax savings in real estate. And in the right situations, it absolutely can. But it’s also frequently misunderstood. Cost segregation doesn’t create new deductions. It simply changes when the IRS allows you to take them. What Cost Segregation Actually Is By default, residential real estate depreciates over 27.5 years. A cost segregation study analyzes the property and separates parts of the building that the IRS allows to depreciate faster. For example: 5-year property • Appliances • Certain fixtures • Carpeting 7-year property • Some equipment and removable property 15-year property • Land improvements like parking lots, sidewalks, and landscaping Instead of treating the entire building as one asset, the study identifies pieces of the property that can be depreciated on shorter schedules. Cost segregation essentially separates portions of the property that the IRS allows to depreciate faster than the standard 27.5-year schedule. Many investors confuse cost segregation with bonus depreciation, but they serve different roles. Cost segregation identifies and qualifies the components. Bonus depreciation determines how quickly those qualified components can be deducted. The study itself doesn’t create deductions. It simply allows investors to take more depreciation earlier in the ownership period. With 100% bonus depreciation active, those components can often be fully expensed in year one. Even without bonus depreciation, these shorter-life assets still depreciate faster because they use accelerated methods like the 200% declining balance for 5- and 7-year property and 150% declining balance for 15-year property, which front-loads depreciation into the early years.

After three years in multifamily operations and underwriting over $250M in potential acquisitions, I wanted to share some of my observations and perspectives. I am not claiming to know everything about this stuff, because I certainly do not. I’m still learning every day, but I hope these insights prove useful and spark conversation about important topics in the multifamily world. Here is the thought I will be unpacking today: There is often a noticeable pricing and cap rate gap between 1970s vintage product and late 80s / early 90s vintage assets, even when they sit in the same submarket. For seasoned investors this may seem obvious, but I think it’s worth breaking down the underlying reasons. If you feel I missed anything feel free to comment and let me know. Below are some of the biggest reasons I believe this gap exists, along with a few things I personally look for when underwriting and touring these types of assets. TLDR: 1970s multifamily properties often trade at higher cap rates because they carry more operational and capital risk. Aging/out-dated plumbing, environmental considerations, insurance friction, and dated layouts all contribute to the discount compared to late-80s or early-90s product. But with careful diligence and the right business plan, that discount can also create opportunity. --- Why the market discounts 1970s product 1. Major systems are closer to the end of their life Many 1970s properties are approaching replacement cycles on multiple systems at once: Roofs Plumbing Electrical panels Parking lots HVAC systems When several of these items hit their replacement window at the same time, buyers must underwrite meaningful near-term CapEx. That risk gets priced directly into the purchase price. This can be the case with 80’s and 90’s product as well, but you may be going on even ANOTHER replacement cycle for some of these systems. 2. Plumbing systems and repipe risk One of the biggest dividing lines between vintages is plumbing materials.

Recourse vs non-recourse debt is a crucial concept for multifamily investors and newer syndicators to understand. If you buy a 50-unit deal with a recourse loan and it goes sideways, you could lose the property and still owe the bank money. If you buy that same deal with a non-recourse loan and it fails, you lose the property, but the lender generally cannot come after your personal assets. That one distinction has massive implications for overall risk mitigation (or lack there of it) across your investment portfolio. Recourse Loans A recourse loan means you personally guarantee the debt. If the property cannot cover the loan balance, the lender can pursue your personal assets to make up the difference. Why lenders like it: • Lower risk to them • Often easier approval for smaller or newer sponsors • Sometimes slightly better pricing Why it is risky for you: • Your personal balance sheet is exposed • Higher psychological pressure • One bad deal can affect everything Non-Recourse Loans A non-recourse loan limits the lender’s recovery to the property itself, assuming no fraud or “bad boy” carveouts. Why sponsors prefer it: • Your personal assets are protected • Cleaner risk separation • More scalable for syndicators Why it can be harder: • Stronger deal metrics required • Experienced sponsorship often expected • May carry slightly stricter structure When each is typically used: Recourse is common in: • Smaller multifamily deals • Community bank financing • First or second deals for new operators • Bridge loans where lenders want extra security Non-recourse is common in: • Agency debt through Fannie Mae or Freddie Mac • Larger stabilized multifamily • Institutional or repeat sponsors • Deals with strong DSCR and occupancy For syndicators, this decision is not just about gunning for lower rates or closing the deal, it's about risk allocation. Are you comfortable tying your personal net worth to the outcome? Or are you building a structure where risk is primarily contained within the asset?

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