Thoughts on using SOFR rates for investment analysis?

Question

I have noticed a lot of institutional shops and real estate private equity firms will factor in SOFR rates into their analysis. Do you all think it's necessary to do so when investing in multi-family properties from 1-50 units? If so, can you elaborate on how you use them as I am unfamiliar with how to incorporate them? I understand they serve as a benchmark when calculating the discount rate but I see people try to predict them on a 10-year basis which seems incredibly difficult for first-time investors and ultimately, we never know what they will be.

- Adam

Greg Scott · Answer

Having worked in a large corporation most of my career, the more analytics you throw at something, the more comfortable management feel about actually making a decision.  I suspect that is driving some of the behavior you are observing.  Nobody has a good enough crystal ball to accurately predict SOFR even out 12 months, let alone a decade.

Since 5-50 units is not institution grade, I don't think you need to replicate the neurosis.  If the deal makes sense today at today's price and interest rate, it is probably a good deal.  Just don't try to make it a good deal by assuming appreciation or lower rates will happen.  That is just speculating.

Greg Kasmer · Answer

Adam - Happy to share what I use to underwrite deals in the 10-50 unit. Just reach out and message me!

Adam Taylor · Answer

Appreciate the insight, Greg! I borrowed an underwriting model from a Real Estate Private Equity professional and it seems a little too complicated for what I am doing now and what I plan to do in the future. Happy to trade underwriting models if you are interested or if you have a genuine interest in taking a look for me and letting me know your thoughts.