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.
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.
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:
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.
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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Omaha is most notably known for hosting Berkshire Hathaway's headquarters, but to one's surprise, in CNBC's Top Business States Ranking, Nebraska was #7. The low cost of business and centralized location in the midwest has attracted many new companies and commercial development. As a result, the metro continues to see job growth, with unemployment down 2.7% year over year.
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Greater Boston is home to over 118 colleges and 346,000 students, making it the city with the fourth-highest concentration of colleges in the United States. Universities, healthcare, and finance drive the metro's economy, but additional housing is desperately needed. The metro is undersupplied by 77,000 units, leading investors to redevelop office space, factory buildings, and more into residential space.
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The multifamily market's current rhetoric is a swirling cycle of good, bad, and ugly. There still is a housing shortage, rents are declining, capital has dried up, and the Federal Reserve is still raising rates. As an investor, how do you navigate these circumstances? The team at Rockval spoke with Bobby Larsen, Principal of Vanamor Investments, to get his insight on the current market conditions. Larsen has over 16 years of multifamily experience, initially starting his career at PIMCO and eventually moving to MG Properties Group. As the Director of Acquisitions at MG Properties, Larsen helped grow their portfolio from $500 to $4.5 billion AUM during his seven-year tenure.