It All Starts With the Foundation

The Most Important Things

Strong investment results start with a solid foundation.

If we can get these core elements right, we can likely generate meaningful returns while limiting unnecessary risk.

Our due diligence process and framework has evolved over the years. We have had success with this framework along with a few hard lessons when we strayed too far from the fundamentals below.

While our full due diligence process requires a much more in depth process than what is shown below, these are some of the core ingredients of what we think makes a good investment.

1. Debt structure is often the single biggest driver of outcomes

Before anything else, understand the debt:

• Fixed vs. floating interest rate

• Loan term (when maturity hits)

• Leverage (loan-to-value)

Leverage amplifies outcomes — both good and bad. Reasonable debt service and manageable leverage provide breathing room. Cash flow solves most problems.

Key metrics to review:

• Breakeven occupancy

• Debt Service Coverage Ratio (DSCR)

Both should be reasonable.

2. In our experience, the manager often matters more than the deal itself

We place significant weight on the sponsor and their track record, alignment, and execution ability — often as much as the underlying numbers.

Understand:

• How the GP gets paid

• Acquisition fees

• Promote structure

• Incentives and alignment

Ask them directly how they make money — then confirm it in the documents.

Large firms are not automatically better. As funds grow, maintaining underwriting discipline and selectivity can become more challenging.

3. Location Is Strategy

Macro market matters (MSA), but the submarket matters more.

Know:

• Median household income

• Affordability vs. projected rents

• Supply coming online

The business plan must match the neighborhood. Don’t put luxury finishes into a workforce area and assume renters will pay for it.

If you can’t visit in person, look at Google Street View. Your instincts are usually right. Regardless of projected hold period, be willing to own the asset long term.

4. Survive Downturns

Macroeconomic forces drive much of real estate returns.

So ask:

• What happens if rents don’t increase?

• What if vacancy rises?

• What if execution is imperfect?

• What if interest rates increase?

The more variables that must go perfectly, the more fragile the business plan.

Market cycles often only become clear in hindsight.

Example: In Austin, rents declined nearly 20%. No one projected that.

Invest accordingly.

5. Operations Drive Performance

The on-site leasing agent can have a disproportionate impact on the outcome of a multi-million-dollar business plan — and millions of dollars of investor capital. Active asset management and disciplined operational oversight are essential.

Vacant units hurt.

Evictions hurt more.

6. Don’t Force Deals

Sometimes the best deal is the one you choose not to do.

Absent strong supporting evidence, rent growth assumptions should be conservative.

Final Thought

In the late 1980s, following the collapse of the Southwest U.S. real estate market, a Trammell Crow partner reflected:

“It’s easy to overpay for projects if you only focus on the upside — do not assume the world only goes up.”

Wise words then — and just as relevant today. We look for projects that can withstand the stress tests we apply before committing capital.