If you review a handful of multifamily syndication deals, one common theme you will see is a claim of conservative analysis in the underwriting. However, the interpretation of what conservative means varies greatly from one sponsor to the next and can often be confusing to investors. Today we briefly discuss what it means to be conservative in deal analysis and how Apogee Capital approaches this delicate topic.
Being conservative is important but not the full story
The high level purpose of conservative analysis in real estate is to provide cushion to each of the assumptions made. These assumptions include rent/expense growth, expense budget, rent proforma, entry and exit cap rates and much more. While no investment in guaranteed to be immune from difficult economic times or unforeseen operational issues, padding your assumptions with conservatism allows you to better weather these challenges and still provide solid returns to your investors. At the same time, one cannot be so conservative that they are never able to find a deal for investors either. Finding this balance between conservatism and realism is one of the most challenging things that comes with being a deal sponsor.
How does Apogee Capital approach conservatism in our underwriting?
Selecting an investment opportunity is something we take very seriously at Apogee Capital. For every deal we offer to investors we have at least 100 others that have been thrown out because they didn't meet our criteria or we weren't able to acquire them at a suitable price. Our goal is to make each assumption both realistic and conservative in order to give us the best chance at winning a given deal while still having confidence that we can provide our projected returns to investors. For example, if we have data saying rent growth over the next year will be 6-7% for a given area, we will likely be underwriting to 4-5% to allow for error in said data and also to give us cushion as we work to implement our business plan. In short, you have to give credit for growth where it is merited, but doing so at a discounted amount gives peace of mind to ourselves and our investors.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.