Let’s debunk another multifamily myth.
Click here to read my debunking of another common money-raising myth – that you need a strong track record in multifamily to raise money.
The myth I will debunk in this blog post is “I shouldn’t be doing any apartment deals until the coronavirus pandemic has passed.”
The key word is apartment deals. This blog post will focus on how you can continue to do apartment deals during the coronavirus pandemic.
My company recently renegotiated an apartment deal that we placed under contract before the coronavirus pandemic. My consulting clients are still actively looking at deals and putting them under contract. Active investors I have spoken to on my podcasts are still doing deals.
In fact, many active investors I have spoken with who raise money for their deals are saying that they are seeing an increase in demand. With the amount of uncertainty in the stock market, people are looking at passive real estate investing as an alternative.
What is allowing investors to continue to do apartment deals during the coronavirus pandemic? Because they understand what changes need to be made to the underwriting assumptions.
When analyzing apartment deals, you input your income and expense assumptions. Then, you determine the purchase price that will result in ROI projections that meet your passive investors’ financial goals. If you use pre-coronavirus underwriting assumptions, you are virtually guaranteed to overpay and fail to meet your projections.
Therefore, if you want to do deals during the coronavirus pandemic that conserve and grow your passive investors’ capital, here are the four changes you need to make to your underwriting process.
1. Year 1 Operations
It could be expected that there will be an increase in vacancy, bad debt, and concessions throughout 2020. Once things settle down a bit and the economy reopens, it is possible that some residents will no longer be able to afford living at the apartment any more.
Therefore, year 1 projections should assume some softening of the rent roll. That is, higher vacancy, bad debt, and concessions than the T-12 and typical market rates.
2. Rent growth
The rent growth for 2020 in the vast majority of markets is projected to suffer as unemployment rises. However, most of any rent lost in 2020 is expected to be recovered in 2021. Therefore, rent growth in years 1 and 2 should reflect the immediate area and demand in the market. This information will come from your experienced property management company.
As of right now, most private lenders are taking a “pause” from bridge lending. However, lenders that are still active are being extremely conservative with their loan proceeds and terms. The agencies are lending, yet they are also being conservative on their underwriting and requiring large upfront reserves for debt service payments. Therefore, more conservative proceeds should be underwritten and the underwriting needs to include these upfront reserves as it will impact the equity required to fund. Make sure you ask your lender or mortgage broker about the new LTV, upfront reserve requirements, and other terms prior to submitting an offer on a new deal.
4. Value-Add Deals
Depending on the deal, we have seen many owners pause their interior renovation programs until the markets re-stabilize. When underwriting a deal, it may be wise to assume that the value-add program does not start until the overall market stabilizes.
Overall, it is a myth that you shouldn’t be doing deals during the coronavirus pandemic. But you will need to make the correct updates to your underwriting assumptions:
- Underwriting higher vacancy, bad debt, and concessions during year 1,
- Underwriting a lower rent growth during year 1
- Include any upfront reserves that are required by your lender
- Expect to delay your interior renovations if you are a value-add investor.
If you make these four underwriting changes, you can continue to do apartment deals during the coronavirus pandemic.
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Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.