Answers to three questions investors are currently asking us:
Topic:
1) What are the top three danger signs you see in deal prospectuses you are reviewing?
1) Negative leverage. Some is ok if the business plan warrants it, but in today’s environment, the focus should be on positive cash flow.
2) Short-term rent growth. Most markets have an influx of new apartment supply which will push down rents and keep them flat. Prudent underwriting has below-average rent growth in the short term.
3) Low exit cap rates. No one can predict the sales market in five or 10 years. So, it’s best to have a conservative exit cap rate based on today’s market.
2) How does Calvera decide it is time to sell a property?
We start to think about selling when either the business plan is complete or we believe the property’s value is in excess of our pro forma sales price. In many instances, we’ve sold properties earlier than projected because of these factors.
3) What’s an acceptable cap rate for Calvera?
This is a moving target and dependent on the debt. If a loan is 5.8% (today’s rates), then we’d like to buy a property at a 6.0% cap rate. That’s positive leverage. If the loan costs 4.5%, then perhaps a 5.0% cap rate is the correct level. We look for positive leverage that will produce consistent cash flow over the long-term.
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