Had a couple of questions relative to value-add apartment investing in the currently market. It seems as though most/many LP equity groups have re-calibrated their return expectations as multifamily has seen a phenomenal run coming out of the recession. Most deals I am seeing (I focus on the west coast) have already been bought and sold at least once since 2011-2012, not much meat on the bone, alot of partially-rehabbed deals or similar.
That being said, those of us who are in the space still need to dig for deals, and often times need to talk ourselves into believing the "upside" story.
For value-add deals, are LPs generally still looking at the back end IRR as the major metric for deals? I keep hearing that LPs are drawn to multifamily due to the yield play, which would imply that they are looking at cash on cash yields, no? Most 3-5 year heavy value add deals I am underwriting have fairly shitty yields through the rehab period, unless you assume a refinance scenario after the rehab is complete and then just hold for a nice cash yield and maybe take a lesser IRR by holding longer term. Is anyone out there underwriting value deals for LP equity where the LP wants to hold for longer term to milk some cash flow post-reno?
Regarding debt financing, is floating bridge debt the best execution assuming a 2-3 year rehab? I haven't done much non-agency debt on multifamily, but on some of the commercial office value deals I did, getting 65% initial funding plus 100% of capex and TIs/LCs was achievable (250-350 over LIBOR pricing). On multifamily, is it possible to get 70%+ LTC on deals and have lender fund the reno capital through the loan?
Assuming that the strategy was to refinance the bridge debt after 3 years with longer term (i.e. agency) financing and enjoy 5-7 years of decent COC, how are the agencies generally sizing the take out? Debt Yield, DSCR, etc? Is interest only available on a refinance scenario, or would it typically be amortizing? Assuming that bridge debt was taken out 100% with no cash out (likely leverage on refi would be 60% of the new stabilized value).
Many thanks!
I'm a GP for a value-add multifamily group so I can share our experiences....
1.) Agree with above post but also we have been seeing LPs say we'd like to provide a current coc yield throughout the rehab period AND a decent IRR. What ends up happening there is a bit of financial engineering where a current pref reserve is built into capitalization at the expense of 50-75 bps of IRR. Markets better though (14% IRR with 5% coc out the gates that grows to mid teens vs 15% IRR with no distributions for 2 years).
2.) We've purchased with both bridge debt and floating agency. Floating agency has been the better choice due to the additional term, better pricing, and ability to refi without much or any prepayment penalties. Downside is the leverage can be a bit lower than bridge.
3.) Yes I/O is available on take-out refi with agency (and cash out is fine too). Depending on leverage of refi (we've been successful getting 80% of appraised value), 2-3 years is an easy target but we've been able to get full term if we drop leverage a bit. I will say that a 65% full-term IO refi that produces a nice lump distribution and creates mid teens coc yields on outstanding capital is very attractive to LPs right now.