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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Hi Multifamily fam, I love the Synthesis MF deal analyzer. I do have a few questions on it if someone could help out? 1. If we want to buy out the LP's upon refinance, How do we build that in the model without deleting lines beyond the refi year in "Returns" tab? 2. If I have a unit type with 10 units and i'd be doing value add by adding 5 more units, is there a way to capture this? 3. Would be great to see the proforma P&L by Month. This will be great to build the budget. The monthly will also help monitor variances and progress against the actuals. Is this on the roadmap? Thank you!