What's the lowest cap rate you've ever bought an asset at looking to do just a minor refurb / limited capex and stil projected a return above say 18% on a levered basis? i.e. what's the highest rent growth you've ever put in a pro-forma and gotten through IC? let's assume the we're in the modern era and ltv is 50-65% not pre-bust 90% lev cause that distorts things.
Trending Content
| +48 | Being asked to stay behind and train my replacement | 14 | 3d | |
| +45 | New Comp Database - Google Form (Now with Data Validation) | 24 | 6h | |
| +30 | What does REPE actually do? | 12 | 1d | |
| +25 | Leave brokerage to be GP | 2 | 3s | |
| +24 | Seeking Career Guidance in Real Estate Development Post-Graduation | 3 | 9h | |
| +24 | Public Homebuilders | 9 | 1d | |
| +22 | REPE/Development GPA | 15 | 1d | |
| +17 | MSRE/MSRED with no RE experience; Naive to think I’ll land a job afterwards? | 4 | 3d | |
| +16 | UC Berkeley MRED vs Columbia MSRED? | 2 | 5d | |
| +15 | Hospitality Finance - Perks? | 3 | 6d |
Career Resources
You could probably figure out the answer to this question mathematically through sensitivity analysis brah - Cap rate compression needed for given rent growth or vice versa to achieve a given return based on your static variables.
At any rate, interested to hear what others chime in with.
In order to get an 18% return on an asset that requires little capex, you are going to have to find a property with serious vacancy issues due to bad management that will be off market.
Won't get 18% ROI in this market without taking some risk, as you won't get any help from appreciation right now. Your market cap rates are around 4-8% for a stabilized property.
For example, I had a friend purchase a multi family building from an older woman whose husband passed away. Vacancy was around 30% with lower then market rents. He purchased the property for $1.1 Million with like 45% down. He put in some money to fix the units (idk how much, maybe $5K a unit). Property is worth $1.4MM now.
Are you guys really seeing 50-65% LTV? We're consistently lending on office/retail at 65-70% and 75%, sometimes 80% on multi-family... For well-performing properties and experienced developers/operators, we're re-leveraging them to these levels too sometimes
No, you are correct. LTV is generally still 75% for a stabilized property, but if you are going to purchase a building only 50-70% occupied you are going to need to put more down then 25% (generally). I have been telling clients to expect at least 30% down for traditional financing, unless you want SBA financing.
Alright I see what you're saying. We generally require an appraisal and will use the as-stabilized value of the project. I guess I see more ground-up development than minor reno though. I'd be interested to underwrite some properties as mentioned, as that's what I'm interested in doing personally on a much smaller level. We lend on the lower of LTV or LTC, too.
*I should note that we use as-stabilized for experienced real estate investors and clients that we see growth with. Not sure we would loan that high on a one-off deal with someone who has no experience or we see no future opportunities with.
Rental growth in terms of growth in existing rents passing at the property level, or growth in market rents?
The IRR will be very sensitive to your holding period. You need to see what your 3-5 year hold IRRs will be in case you aren't able to sell the asset quickly, to see if you can live with that scenario.
The lowest cap rate deal I've ever done on an asset/portfolio (not corporate) was around 4% (taking into account transaction costs, i.e. net initial yield). It was an office building. We factored in a 10% increase in market rents (a rent spike) after several initial years of decline and then long term growth in line with inflation. The LTV was very high though as it was a restructuring deal (crammed down some junior debt and funded leasing costs/TI/minor capex). The equity was pretty much wiped out, but we kept them in the deal as management with a carried interest/"hope" note.
As for your example, the only way I can see getting to a 18% return (IRR) with only a 65% LTV is to have some yield compression and significant lease up/rent reviews in as short a period as possible (12-18 months). Maybe even obtaining planning permissions for an extension that a buyer can take into account for when you want to exit.
We did one deal in the West End (London) years ago, also office, where we had a rent review increasing actual rents in the property by over 12% (it was under-rented) and exited at a 5.25% NIY when we had bought at 5.75% NIY in about 12 months. The IRR was high due to the short time horizon and highish LTV (75%). If we had held it for longer than 12 months our IRR would have reduced dramatically.
I would also model an (alternative) scenario where you need to hold the asset for longer (say 3-5 years) and have more moderate "long term" rental growth to see if you can handle the lower case returns without losing money or it being a major drag on your fund's returns.
Yeah, I'm looking at a deal in an asian growth market now somewhat similar to the first one you mentioned, but even more crazy. Rents in the market have gone up 60% in three years and most of the leases were before the jolt. We're considering buying around 4.5% and predicted rent growth 35% next year and 20% the following year or some shit... it actually seems reasonable considering when you look at the surrounding comps they're all renting at +30-40% (if they were completed recently enough to not have many leases from pre-explosion), but there are old men who's experience is in America/Europe on the IC and I dont' want to get laughed off the stage by these dudes... anyways, was just wondering if you guys had seen similar situations where the initial smell test seems totally wrong but there's actually logic behind it etc.
double
Well, if you have rental comparables i would definitely highlight that, but be prepared to explain what happens if there is a slump, or if you end up having to hold on to the asset for longer (i.e. make sure you've modeled that scenario so that you can answer their objections). They'll definitely object if they're not familiar with the market, so you need to be prepared by showing actual comparables and educating them about the market.
Another issue, can you review the rents upwards or are there legal limits (e.g. rent control, or leases without market rent reviews)? Another issue you have to factor in is the additional leasing costs/tenant improvements and time to get new tenants at market rents. If you're going to have a high increase in rents some tenants won't be able to afford it and will have to leave. It will take time to re-lease their space.
If you're modelling very high rental growth i would be conservative on the exit cap rate. Just to be safe, as your going in cap rate probably reflects high growth assumptions.
Thanks relinquis. Am being fairly conservative on exit and have comps... No rent control issues. Anyways, well see what happens. I could say more about this to shed light on the issues but it's an open forum... As you all know
Thanks relinquis. Am being fairly conservative on exit and have comps... No rent control issues. Anyways, well see what happens. I could say more about this to shed light on the issues but it's an open forum... As you all know
A dolorem reprehenderit ut perferendis reprehenderit. Vel sint nostrum numquam. Labore fugit dolorem et quae ut expedita rem. Quia consequatur dolor et reiciendis autem earum. Consectetur libero modi odit odit aut excepturi fugiat.
Nam sed voluptatem voluptas nam. Sint et atque labore perferendis. Omnis dolore blanditiis et et repudiandae.
Numquam dicta necessitatibus accusamus. Voluptatibus qui qui vero. Sunt deleniti in qui consequatur repellendus praesentium. A explicabo inventore ipsum accusamus ut voluptatibus sed.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...