How to Mitigate the Risk of Recession by Investing in Apartments
With Percy Nikora, Co-Founder
Again, every market has its ups and downs, so I'm sure, at some point, there'll be a little bit of a dip in the market. We are actually anticipating that, so when we underwrite the deals, we use a higher cap rate. If we buy the property at a particular cap rate, a lot of sponsors will keep the cap rate the same or even decrease the cap rate, which goes in their favor. We actually increase it, saying that we believe the market is going to weaken. So, when we sell it a few years from now, we're selling it with the assumption that the market would not be as strong. If that still generates good returns, then we know we're in a good spot because if the market happens to be where it is, or improve, that's great. That's just icing on top of the cake. But if it doesn't, we've already underwritten for that scenario.
It's just one of those best practices, I guess, by looking a lot of these underwriting models ... And I'm not taking credit for it. I'm sure Ed does most of our underwriting, but I think, having looked at hundreds of deals and hundreds of other opportunities that were brought to us by other sponsors, you start to get a sense of what the "good" sponsors are doing versus the not-so-great sponsors. We obviously want to be on the- align ourselves with the best in class or even surpass that, so we try to walk in the shoes of the investor and say, since we are an investor in this deal, what would we want to see as an investor and do that for this deal, when we bring it to our equity partners.
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