Many investors have been sitting on the sideline, holding their breath, waiting for markets to settle. But others, like Gregg Scully at Real Wealth Solutions, can successfully apply their conservative approach to underwriting in a stressed market. Real Wealth Solutions focuses on acquiring and managing multifamily and RV assets in Eastern Tennessee and the surrounding markets and continues to find creative ways to find attractive acquisitions for their limited partners. Multifamily cap rates are sub-6% in Knoxville and even lower in Nashville, but Scully prefers to look at the surrounding ring of these bustling cities.

As we know, underwriting is highly subjective. Many sponsors will rave about their high IRR or sexy re-finance scenario to lure in investors. However, Scully takes a different approach. His conservative underwriting hardens his ability to stay focused on longer-term capital goals. When asked about the current market conditions, Scully replied, "the market doesn't care about what I think." He stresses the importance of fundamentals, often utilizing third parties to punch holes in his underwriting. This approach yields him confident investors and enables him to execute a robust business plan. In a tight market, it is essential to be proactive, as there is always a deal around the corner that will make sense.

Why Eastern Tennessee?

Eastern Tennessee's tertiary markets are a great place to implement this strategy. In many of the Eastern Tennessee deals Scully underwrites, the primary value-add component is simply re-leasing current units to market rate. Many owner-operators have played it safe with sub-market rents, leading to suboptimal capitalization. Real Wealth Solutions underwrites with an expected 24 - 36 months to full occupancy stabilization at market rents.

With some elbow grease and renovation work, Scully can add an additional $350 in monthly rent per unit ($4,200 annually). But just because a deal has a significant upside on rents doesn't mean it is a home run. Scully says financing rates from community banking are around 7%, forcing deals to trade with negative "initial" leverage. With an inverted spread between cap rates and lending, it is a tough first two years from a cash flow perspective, but with a fortified long-term game plan, the economics make sense. Scully explains the Tennessee market used to be a more level playing field between cash flow and appreciation. Now it is leaning toward appreciation because of the higher financing costs.

Conservative Underwriting Leads to Surprises

Last year Real Wealth Solutions successfully took down a 34-unit property in Jefferson City, TN. Jefferson City is approximately one hour outside Knoxville and has seen positive net migration in recent years. The terms of the 34-unit value-add deal were:

• Owner financed at market
• Well below market rents
• Forecasted to stabilize in two years

In just under a year, the property only has four remaining leases to convert and the converted units yielded, on average, a $200/month premium to the underwritten value-add rents.

In addition to multifamily, Real Wealth is finding value in RV Parks. Scully sees excellent potential in Tennessee's booming tourism industry, hosting scenic views, diverse cities, and a wide range of outdoor activities.

The Rockval ReCap Key Takeaway

While many find it challenging to put a deal together in today's market, others are able to move forward by keeping to the fundamentals and navigating through the key elements of the deal. However, whether it be rent forecasting, capital markets, or cash constraints, one thing is certain, it pays to be conservative. So sit back and study each pitch; as Warren Buffet stated in his 20-slot rule if you only had 20 bets to make during a lifetime, only 3 - 5 will be needle movers.

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