By Pavlo (Paul) Prokop
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” – Warren Buffett
Without capital preservation, your potential rate of return doesn’t mean much. With the recent volatility on Wall Street, the relative lack of volatility that comes from investing on Main Street can be refreshing. Here are some guidelines we have found helpful in protecting our investments from volatile market forces.
- Conservative underwriting
- Start with conservative assumptions. It is advisable to stress test at higher vacancy rates, say 8 – 10% when evaluating assets to see how the asset may perform during economic downturns or if a major employer leaves town.
- Stress testing the asset in underwriting
- Determine the break even occupancy ratio which is calculated as (operating expenses + debt service) / rental income.
- This will tell you what occupancy level you need to maintain to pay the bills from operating income
- HMF team underwrites many deals and we look at:
- Financials (including Trailing 12 or T12 – actual rent roll for the last 12 months); income and expenses (Net Operating Income), repairs, etc.
- Operating expenses (rule of thumb: 40 – 50% of income conservatively)
- Detailed market analysis (we have a data scientist on staff!)
- In-depth neighborhood and rent analysis
- Comparison to like assets and Cap Rates (defined below) including price per square foot
- Median Household Income (what can the resident afford), Median Gross Rent, Demographics, Crime, Unemployment, etc.
- Capital expenses (renovations)
- Skin in the game
- Look for a sponsor that invests their money alongside their passive investors.
- Asset management
- If you are repositioning an apartment, model your cash flow and financing through each phase of renovations to ensure that you have the financial wherewithal to complete your project.
- Independent underwriting with Lender and/or Sponsor in addition to our own underwriting if applicable
- Ignore the broker pro-forma; Horizon Multifamily comes up with our own business plan
- Calculate returns with underwriting software three, five, seven and ten years out
This is just some of the factors that go into our decision making for evaluating multifamily properties. The HMF team passes on a lot of multifamily properties that do not meet our criteria and we are laser focused only on multifamily properties.
Our goal is to be completely transparent to our investors about our investments, let’s have a conversation about your financial goals and see if there is a fit. Or if you have any questions about our current offerings, ask away!
Here is a link to our investor questionnaire form: https://www.horizonmultifamily.com/investor-profile/. Note at this current time, we are only seeking accredited investors.
This article has been prepared for informational purposes only, and is not intended to provide, nor should it be relied upon for legal, tax, or accounting advice. You should consult your own legal, tax and accounting professionals.
Interested in passively investing in apartments without the hassle? Contact us at firstname.lastname@example.org to learn how you can take the first step to your financial freedom.