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Stress Testing Properties - Impact on Returns

How a crisis or any bump in the road can affect long-term returns:

We’ve got to speak with many of you over the last couple months and there have been many changes due to the health crisis. Uncertainty has created a lot of “wait and see what happens” with a lot of people. While nobody knows exactly what will happen, we do know that there are still good investment opportunities available and there are still investors eager to invest. Many of our investors take a long term approach to investing, and don’t underwrite based on what will happen in 1-3 months in one year of the hold period. So what we’ve done in this newsletter is analyze long terms returns, based on some common issues that most investors and lenders are expecting to happen over the next few months:

  1. Flat Rent Growth

  2. Lower Occupancy

  3. Adding in More Reserves - and putting more equity into the deal

Here’s an example sensitivity analysis based on a property that we underwrote for a client:

The #1 thing that stood out is that short term changes don’t affect long term results as much as what we may think. You can still have a good investment even if all three of these things happen, especially when you compare this to other investment alternatives. Even if there’s chaos for a bit, things will still turn out alright if we keep our eye on the ball. So the lesson learned in all of this is to think long term, invest in good assets and focus on operations. Be sure and reach out to us if there’s anything that we can do for you!

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