Coronavirus and Commonly Asked Passive Apartment Investor Questions
As everyone knows, the world has changed dramatically in a very short amount of time. It started with some warnings about a respiratory disease spreading across the Pacific Ocean, but quickly jumped coasts and ground our economy and country to a halt.
When I am speaking to our investors, my goal has always been to understand their goals and problems first, and then offer solutions for those goals and problems. However, as Coronavirus and the economic fallout has become the only news reported, those goals and problems have shifted from optimistic (retire early, passive income, doubling money) to conservative (how are you protecting my money).
So what questions are investors asking:
“How has your business model changed?”
First and foremost, Ashcroft and our property management partners are abiding by all CDC, WHO, and local jurisdiction guidelines. We are cleaning common areas and model units more frequently, maintaining more distance during showings, and allowing for work at home for our employees when feasible. Additionally, on the asset level we are doing far more virtual showings through tools like Zoom, Skype and Facetime.
On the investment front, we have always maintained extremely conservative underwriting standard. Typically, our exit cap rates assume a 10-bps increase in rate per year over our initial cap rate. For example, if we assume that we hold a property for 5 years, the exit cap rate is generally 0.50% higher than our initial cap rate. This makes the conservative assumption that the market will be worse when we sell when we purchased the property. When researching market rents for our renovated units, we historically underwrite rents that are below competitive properties in order to create projections that we are very comfortable that we can obtain. Additionally, the loans that we place on our properties are generally very flexible and help get us through slower periods.
As the markets adapt to a post-COVID 19 world, we will continue to use conservative assumptions when underwriting new potential acquisitions. Depending on the market and property, we may decide to further adjust vacancy, bad debt, rent growth, and renovation premiums to more accurately reflect the recovery of the markets.
Finally, for the assets we are looking at, we have not changed. These Class B assets in Class B neighborhoods have historically shown to withstand recession pressures best. With median household incomes in the $80,000 range, our tenants tend to not be the “first hit” when economic downturns arise. They have savings and can withstand a short period of uncertainty.
“With all the uncertainty, how are you protecting my investment?”
It starts with our conservative underwriting. Then we take it a step further. We run a detailed sensitivity analysis to understand how far off we can slide on rents, occupancy, and cap rates. When analyzing a deal, we look back at previous recessions, and confirm that we are still able to break even if occupancies fall below the low point of prior recessions. In our markets, the lowest occupancies were 87-89%. This allows us a certain level of comfort and certainty to maintain positive cash flow and distributions, thereby allowing us to ride out any downturn and never forcing a sale.
“What are your thoughts on how things will play out?”
We do not have a crystal ball. But we do have data from the 2008 recession, which was not only kicked off by the credit crisis, but additionally we had the H1N1 global pandemic spreading in the spring of 2009. Multifamily as an asset class faired the best of all real estate during the last recession. After their grocery bill, the second bill consumers pay is rent.
In the near term, we understand that consumers and our tenants will feel some pain, as everyone is, and we are adjusting our underwriting on assets to account for this with increased vacancy, bad debt and lower market rents.
“Is real estate a good investment in these uncertain times?”
We continue to be bullish on multifamily real estate. While people may choose to not open a new retail store, or expand their company needing more office space, people will always need a place to live. When we provide a clean, modern space with all of the amenities of the newly built complex, but at 30-40-50% less in monthly rent, we will continue to see strong leasing momentum.
Additionally, we are not relying on market appreciation for our investments. We view each property as a standalone business; one which we know how to grow income. Regardless of the market cycle, we can add more income by implementing our value-add investment strategy and force appreciation. And that stronger income stream will always have a value to a future buyer, even if the cap rates relax.