The Number One Way to Reduce Risk in Commercial Real Estate
With Percy Nikora, Co-Founder
So when it comes to a risk mitigation, particularly in multi-family. It's what is the future market going to look like and the way the market value is tracked is in terms of a of a cap rate. And so when we buy the properties that's bought at a particular cap rate.
And when you sell the properties that sold at a particular cap rate and in our underwriting assumptions, we go out three years, five years, seven years, even sometimes 10 years to run different models and say what would happen if the cap rate were to increase. Now, this is where I think some sponsors keep the cap rate the same. And sometimes they even lower it, which means they're they're saying the market is going to continue to improve.
And what we like to do is we like to increase the cap rate, which means we would say that the market is going to soften or at least put that under in our underwriting assumptions and we increase it by a significant margin. So that's our our cushion or our padding. So if the market happens to soften at some point in the future, that's already underwritten into the ordeal of metrics.
And and if the market does not if it stays where it is or even improves, that's just icing on the cake for us. And that's even more return for our investors. So that's how we. That's one of the things we used to do, hedge our beds or to mitigate some of the risk of the unknown unknowns, so to speak, or the market softening and moving forward.
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