Intro to Syndications
Apartment investing has been extremely competitive over the last few years and despite the continual cap rate compression bringing down investor returns we strongly feel that cashflow investing in recession-resistant assets is a prudent strategy over holding more than 20% of your cash/lazy equity on the sidelines. The last decade some say has been the golden age of apartment investing (especially in the state of Texas) however one has to suspect that we cannot sustain this kind of current growth. A market reversion or leveling off is bound to happen we want to protect our capital while growing it as best we can.
Mortgage rates remain super low and John Burns is giving us all the green light!
Investing as a Passive LP requires High Level due-dilligence
In late 2020, I have seen a couple of “tricky” methods that deal operators employ in their underwriting.
- We have discussed this many times previously especially on Passive Investor Accelerator & Mastermind calls and has been known as “Cap Rate Gate” where a lower than reversion cap rate (exit) is used. Simply stated a 0.5-1.0 increase from your prevailing cap rate to your projected reversion cap rate is known as a conservative measure to assume for a softer market at the time of sale and to create a bit of contingency. Many institutional operators when asked on a panel will admit to using a -0.25 to +.25 factor on their reversion cap rate. Yikes!
- Underwriting a high reversion capitalization rate upon the sale of the asset, but still being more aggressive on operational components like rent growth and expenses, compared against the projections of market analysts. Often times we take exception to bump the rents anymore than 12-15% unless a heavy amount of value add is being completed (over $8,000 of upgrades). Every deal is different off course and you might be working with a fat deal with severely under market rents as it stands today.
- Inflating “other income” or nonrental revenue such as trash valet, additional storage fees, reserved parking, vending machines, or any new type of service that may or may not be tested by the current clientele. This has been a way to sneak deals past even the most astute LPs who have an understanding of underwriting.
If you have 5-10 hours knock out the New Syndication eCourse
More thoughts of investing in a post-pandemic world.
PS: Wanted to send out my last Investor Letter just in case you did not get it. It’s a quarterly compilation of the best news and data I am looking at as well as a bunch of my own thoughts and commentary.
How We Manage Our Deals
We come up with our operating and rehab budgets (with deferred maintenance) independently using the knowledge of past projects in the same area.
We are also able to utilize big data to give us insight into the operating budget of other comparable buildings in the vicinity. The second piece is that we have our property manager (even before acquisition) walk all units to come up with their operating budget and rehab budget.
From there we collaborate with them to build our team’s budget and add some room for contingency.
This sequence creates a level of expectation that the property manager is held accountable for with the bottom line (Profit and Loss statement) being the performance rubric.
That said overall yields might be dropping. However, we don’t undertake a project unless we underwrite it the right way and feel more than comfortable taking on investor capital.
New Stimulus Plan
With the new stimulus plan coming out (with likely more on the way from Mr. Biden) it makes me very optimistic that the Government will continue to print money.
Where is it all going?
Who knows but I know some of it will make its way to Mainstreet and I know it will help workforce housing operators and investors like us!
All I know is inflation is in the future and I want to get as much good debt with hard assets now.
Don’t be shy! Let me know:
-A suggestion on what SimplePassiveCashflow.com can do to help you?
-A question you have?
-What is getting in your way? Barriers?
Let’s Talk!
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Building Your Portfolio
How does this news make sense! Only invest in real assets that make sense!
Testimonial
Get to know Sean, who joined the Remote Investor Incubator and also experienced the Mastermind community through the 2021 Virtual Bubble event!