Probably investing has been extremely competitive over the last few years. And despite the continual cap rate compression, bringing down investment returns, we strongly feel that cashflow investing in recession resistant assets is still a prudent strategy over holding more than 20% of your equity on the sidelines.
You guys are watching on the YouTube channel and the behind me, that’s a who’ll to one of our stabilized assets in Houston, Texas, but I wanted to take today to just talk about what’s been happening in an apartment investing lately now. Probably investing has been extremely competitive over the last few years.
And despite the continued cap rate compression, bringing down best returns, we strongly feel that cashflow investing in recession resistant assets is still a prudent strategy over holding more than 20% of your equity on the sidelines where it’s not making anything there. The last decade, some say has been the golden age of apartment thing, especially in the state of Texas.
However one has to suspect that we cannot sustain this type of thing. Current growth, which is always what your purveyors are going to be saying. But as the person I’m thinking about as addicted, what the last five out of the last two recessions in the last 20 something years for our clock is always right.
Twice a day is the same. They’re just here to sell books. They’re not investors, they’re just economists. They’re just like the weather now in market reversion or living off is bound to happen. We want detect our capital while it’s growing. As best as we can. How do we do it? Our goal is to stay in the game, get cashflow and mitigate our risks by conservative underwriting, using data or network of our operators, which is in the ground due diligence data that is not available to the public such as CoStar, which owns apartments.com and is big glomerate data.
There. We get the market rent, roll vacancies, or should cavalry. Et cetera. In 2019, I had seen a couple of tricky methods that do operators, will I in their underwriting, I go into this great detail in the syndication LP course, which is for purchase. You go to simple passive slash versus, and you can check out all the other eCourses we have.
Now this course I developed exactly for the passive LP investor. So if you’re busy, This is the best way you’re going to get up to speed with evaluating which investments to people like into. But anyway, let’s get into these tricky methods. First, as I discussed many times before you have to look at this cap rate to reversion cap rate, and I named this, the cap rate gate, where lore than reversion cap rate exit is used.
Normally, I like to see a 0.5 to 1% increase on your projected reversion cap rate to your prevailing cap rate. And the reason why I want to assume that the prevailing cap rate is lower than what we assume is in the future. Assuming that you’re going to be selling in a junker market, if it goes better.
Awesome. More money to us as investors, but let’s assume that we’re selling in a worst soft markets. That’s the reason why we’re assuming that we’re taking the prevailing cap rate. See it’s a five cap and we’re adding a half a point to a full point, right on top of that for the version cap rate in your underwriting to make it five and a half, or maybe you get 6%.
This is where I like to afford a lot of the contingency things. Aren’t going to go perfectly. There’s a lot of infant life and things typically go wrong. So by doing this, you can put a lot of contingency in here, which is ultimately helps you when things go well, now, many institutional operators would ask them this, what are they using?
They’ll admit to be using a negative quarter 0.2, maybe at most, a quarter point increase. Factor in reversion cap rates. So the way we’re doing is actually they’re going a quarter point expansion. We’re going what two to four times that, but Hey, they can do what they want to do. Now. Second being more aggressive on operational components like rent growth and expenses compared against the projection of market analysis.
Oftentimes taking the acception to bump the rents any more than 12 to 15%, I think is crazy. Unless you’re doing a super heavy amount of value, add where you’re doing maybe eight to $15,000 and you have per unit. Now, maybe you might see that 12 to 20% bump. I think I’ve seen a deal the other day, where they were expecting to bump the rents up 40%.
That’s not going to happen in my opinion, if it is, maybe I didn’t look at the DME, but I didn’t run the comps. But when I just saw that, I was like, whoa, that’s a big job. There’s certainly going to be a lot of vacancy as. Your tenants gave you the middle finger as they balk and don’t renew. Now, every deal is different.
Then of course you could be legitimately lower rents, but I think whenever you’re going over that 12 to 50% range, you’ve got to be really scratch your head and really verify those comps. I know we’ve had it. We’ve had deals where the rent sores legitimate under the market, but that’s very rare, especially in these days where it’s very competitive.
Now, another trick that folks like did you in this business inflating other income or non rental revenue, such as trash filet, additional storage fees, reserved parking or covered parking in Texas. That’s a big one for those like hailstorms money for vending machines, wanting to throw up laundry machines or any 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, passive investors. Well, understanding of underwriting, just put stuff into other income category. Because most people don’t look there now, the way we do it is like we come up with our operating budget and rehab budgets with of course deferred maintenance, because that has a bit of a bit us in the butt in the past.
So made that lesson learned, but we independently use the knowledge of our past projects. And it’s great when we have so many properties in that same area that we can benchmark against. We also use the big data from sources like CoStar or the Reece report to give us insight on the operating budget of other comparable buildings in our.
Cincinnati now the second piece of that, and like I said, we, this is independent. Our property manager, even before acquisition is walking all of the units and coming up with their own operational budget, we have budget. So two things there, right? What can we run the property at? And what big deferred maintenance item or what things that they think they can.
Revamping that, and they were coming up with that budget from there, we’ve come up with our numbers, independent, put our heads together. We don’t really peak at what our property management is doing. The team comes together. We create a budget and of course, add someone for contingency and especially in the rehab budgets.
Now the sequence creates a level of expectation that the property manager is held accountable for with the bottom line or the profit and loss statement, being the assumed performance rubric, which means if the property manager comes up with a budget, we’re holding them accountable to that. They don’t hit it.
They’re a gun for hire. We can always fire them and get another one. 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 in taking on investors. But at the time, I think, you know what, you’re probably seeing a lot of strength in multi-family apartments and you’re starting to see some institutions, especially from the retail sector or some office coming into this multi-family apartments is seen as a safe Haven.
Maybe it may not make sense to be in apartments. Of course that’s on the high level. And I think a lot of investors, they listen to a lot of podcasts and they start to get these ideas in their head and they’re not digging into the exact deal. We’re not going into a deal unless it’s one in a thousand and that one in a thousand kind of defies the generalities.
It’s the same. Like all boys are bad when they’re teenagers, they might be on average. But I think if it was yours, you’d probably say mine’s a special right. Kind of the same thing here. Sorry. If I offended everybody. But we’d like to think that the deal that we’re picking, the reason why we’re picking that one is because it’s a one in a thousand deal that sort of the FI’s generalities.
So, yeah. Even if though apartments are getting more and more expensive, trying to pick that diamond in the rough, and this is where I say, like, I think the same example can be where investors are looking at a certain market and say, I don’t like that market. Have you even looked at it? Have you been taking a look at not the MSA, but the market, but only that some market, but what is it on that block?
What’s the vibe of the area. But just some things to be on the lookout for. If you want to learn more about this, go to simple passive cashflow.com/syndication. And thanks for listening guys. Please share this with your friends.
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