Answers to three questions investors are currently asking us:
Topic:
1) Will Calvera’s ratio of debt/equity for acquisitions change in 2024?
I’m starting to see some acquisitions pencil to 70% loan-to-value (LTV) which is a big improvement from 9 months ago when it was closer to 55% LTV. Our fund has a LTV limit of 75% for any single asset and 65% for the portfolio. We find it promising to be within those ranges as we seek acquisitions in 2024. That means more properties for the Calvera Income and Growth Fund.
2) How are skyrocketing insurance costs, effecting your evaluations of markets and properties?
This is having a large impact on potential acquisitions. With property tax estimates in markets with potential weather events (wind/hail/tornadoes) of more than $1,000/unit, it negatively impacts cash flow and lowers values. Many insurance carriers have simply left certain markets. Once they come back in the market, I believe insurance premiums will begin to decrease.
3) What are the pros and cons of using IRR (internal rate of return) to assess a sponsor and/or fund’s performance?
IRR can be a very useful measure of performance if you also take into consideration the amount of equity used and the time horizon. Short deals (i.e., 1-3 years) and those with high leverage (i.e., low equity) will have huge IRRs. If they don’t, then something is wrong and a lot of risk was taken for an inadequate return. What’s more impressive is seeing a high IRR with modest leverage and a normal investment period (i.e., 4-6 years).
Author
Multifamily values have declined 20-30% since 2022. They are likely to get a boost when the Fed starts cutting interest rates. Once that happens, it may be too late to get in. Don’t wait and risk missing a potentially significant multifamily market upswing opportunity.
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