Underwriting During A Pandemic

13 Replies

I am curious to know how your underwriting has been since the pandemic hit this year? With lenders requiring an additional 6-12 months of P&I reserves, rent growth is a big question mark and understanding your tenant base has become even more crucial than ever, there are some significant headwinds that must be navigated at the moment. For us, we are paying close attention to delinquency reports and we are having brokers pull them for us at different points of the month so we can get a better understanding if tenants: can pay, are paying late, or are not able to pay at all.

What are you paying close attention to when underwriting/evaluating an investment opportunity? 

I'd second the delinquency reports. It's always been part of our standard process but it was to identify a looming 1 or 2% hit. Right now I'm seeing properties actually getting hit with 20%+ delinquency. It's very property specific. A 20%+ delinquency property can be right next door to a 1% delinquency property. Yes, part of it is market specific but we've found it's been more manager specific so on top of delinquency reports, make sure to understand their leasing requirements. 2.5/3x income, 650+ fico score, etc. Once under contract, confirm the leasing requirements with a thorough lease audit. Haven't seen a big impact on occupancy or rents but there's definitely cases of high delinquency in all markets.

@Bobby Larsen Great insights! Which markets are you focused in? I haven’t seen 20% yet, but we’ve seen 13-15% so far here in TX. I also agree that management is critical during this time! If they were in trouble before this crisis, they have really had the wound opened up now.

Yeah, no organic rent growth in our models for 3 years+, 2% expense growth. Higher vacancy rates, slower lease up times, greater unit turn costs. Underwriting 6-18 months of reserves depending on the leverage.

Be cautious right now. 

Originally posted by @Todd Dexheimer :

Yeah, no organic rent growth in our models for 3 years+, 2% expense growth. Higher vacancy rates, slower lease up times, greater unit turn costs. Underwriting 6-18 months of reserves depending on the leverage. 

Be cautious right now. 

Hi Todd, appreciate the insights! Would you mind explaining your thoughts on the 3+ years of no rent growth? Is that market/submarket dependent or is that something you are doing across all markets & all deals?  

Originally posted by @Bobby Larsen :

@Hayden Harrington

We cast a wide net: SoCal, PNW, Boise, Salt Lake City, Las Vegas, Reno, Phoenix, Tucson, Denver, Colorado Springs, and Albuquerque/Santa Fe

As for underwriting, -2 to 0% rent growth year 1 and higher renovation costs.

Bobby, those are great markets! How do you like Reno? I have family up there and I think that's an interesting market. We are solely focused on TX markets at the moment, but that is one I'd like to expand into eventually. Out of those markets, which one has performed the best for you guys throughout the recession so far?

@Hayden Harrington

We’re looking in those markets but not yet in all of them ourselves. I previously led acquisitions for a large sponsor up until March of this year when I started a new company. We’ve purchased two assets so far in the PNW.

Reno is a great market. It was probably the top performing market in the country from 2015-2019 primarily driven by the battery gigafactory and data centers to the East and the construction jobs that followed. They couldn’t bring in labor fast enough so labor costs skyrocketed and supply took awhile to ramp up. The job growth story is excellent but supply has finally picked up. Good for the market in the long term but it has slowed rent growth a bit. From 2015 to 2018, rent was growing at 10% a year.

One day I’d like for us to be in Texas as well. We’re a big fan of DFW and San Antonio but it’s like covering California, you need resources and boots on the ground because it’s such a competitive market.

@Hayden Harrington In the HML space we are making sure that any of our borrowers wanting to do the BRRRR strategy are already pre-qualified with a long-term lender for their take out financing and that the lender is actively lending. I know that this is a different space than your original post was referencing but we have made some changes. Before, we wouldn't ever verify the take out financing because if the deal made sense on our books it would probably do the same for the long-term lender.

Originally posted by @Ryan Blake :

@Hayden Harrington In the HML space we are making sure that any of our borrowers wanting to do the BRRRR strategy are already pre-qualified with a long-term lender for their take out financing and that the lender is actively lending. I know that this is a different space than your original post was referencing but we have made some changes. Before, we wouldn't ever verify the take out financing because if the deal made sense on our books it would probably do the same for the long-term lender.

Hi Ryan - interesting feedback! I've heard sellers are very concerned about the ability to acquire financing right now too and that is a huge selling point if you can assure the buyer that you can & will be able to close. We are in best and final on a deal that will require a bridge loan and we have been in constant contact with our lender to make sure we will be able to get the financing we need. We have also been putting financing contingencies in our LOI's, because if the economy takes a sharp turn and lending dries up or rates become volatile, we need to be protected. We had an accepted LOI in early March, but rates were jumping around on a daily basis and we had to put that one on pause (they ended up doing a refi because they got an incredible deal).

 

Originally posted by @Bobby Larsen :

@Hayden Harrington

We’re looking in those markets but not yet in all of them ourselves. I previously led acquisitions for a large sponsor up until March of this year when I started a new company. We’ve purchased two assets so far in the PNW.

Reno is a great market. It was probably the top performing market in the country from 2015-2019 primarily driven by the battery gigafactory and data centers to the East and the construction jobs that followed. They couldn’t bring in labor fast enough so labor costs skyrocketed and supply took awhile to ramp up. The job growth story is excellent but supply has finally picked up. Good for the market in the long term but it has slowed rent growth a bit. From 2015 to 2018, rent was growing at 10% a year.

One day I’d like for us to be in Texas as well. We’re a big fan of DFW and San Antonio but it’s like covering California, you need resources and boots on the ground because it’s such a competitive market.

That is great to know! Every time I visit, it seems like there are more people and more building going on up there! I also like the proximity to CA, but you don't have to deal with state income tax.

Texas is definitely a great place to be, but you are absolutely right. It is extremely competitive here and boots on the ground is pretty much a requirement. If there is anything I can do to help, or if you need any TX insights, feel free to reach out!