MB 110: CONSERVATIVE UNDERWRITING & RISK-MANAGEMENT IN MULTIFAMILY INVESTING – WITH OMAR KHAN
No one wants to lose their shirt—or anything else for that matter—in multifamily investing. But it’s easy for inexperienced syndicators develop an emotional bias and conflate the numbers in order to make a deal look good to potential investors. And passive investors new to the game typically focus on returns, when their first question ought to be about the risks involved. Conservative underwriting is the key to risk management for syndicators and investors alike… But how do you ensure that the numbers are reasonable? What questions should investors be asking? And how can you tell when a syndicator is too aggressive?
Omar Khan is a Chartered Financial Analyst with Boardwalk Wealth, a private equity firm based in Dallas, Texas, that connects international investors with multifamily opportunities in the southern US. Omar is responsible for raising capital, strategic planning, the development of underwriting models, and investor relations. He has 10-plus years of global investment experience, and Omar has participated in capital financing and M&A transactions valued at $3.7B.
Omar joins me to explain how to identify aggressive underwriting and ensure the accuracy of the numbers used in a particular model. We cover conservative guidelines for reserves and loan terms as well as the importance of planning for worst-case scenarios. Listen in for Omar’s insight around what to look for in a syndicator, how to leverage a sensitivity analysis, and the exit strategy questions an investor should ask—and a syndicator should be prepared to answer!
KEY TAKEAWAYS
Omar’s background in finance
- Ten years investing experience
- Raise capital, develop underwriting models (large syndication deals)
How to identify aggressive underwriting numbers
- Unreasonable rent growth projections (4% max)
- Overly ambitious rehab plans
How to ensure accuracy of numbers used in model
- Ranges rather than specific numbers
- Sponsor solicits several data sources
What Omar looks for in the cap rate at exit
- 50-200 basis points higher (3-5 year term)
The internal systems questions passive investors should be asking
- Frequency of communication with sponsor
- Auditing of financial statements (who, how often)
- Systems, resources to resolve problems
The qualities Omar is looking for in a syndicator
- Admit to mistakes rather than blaming others
- Plan for solving potential problems
Omar’s insight around communicating with investors
- Monthly email to relate progress
- Quarterly, annual in-depth reports
- Open and honest when mistakes made
Omar’s advice around conservative loan terms
- Avoid 12-24 month refi
- As long term as possible (even if slightly higher interest rate)
- First question should address risk rather than returns
Omar’s approach to bridge loans
- Don’t touch unless very experienced
- Get out as quickly as possible (12 months)
- Shouldn’t worry about running out of cash
The most conservative underwriting guidelines for reserves
- $1K per unit, one month operating reserves
- Take reserves out of cashflow ($250/unit/year)
- Ensure syndicator has access to financing
The importance of planning for worst-case scenarios
- Use modeling to develop Plan B, C & D
How the passive investor can leverage a sensitivity analysis
- Analyze variables (i.e.: holding period, interest rates)
- See where IRR, exit cap lies in different scenarios
Omar’s advice on the exit strategy questions to ask syndicators
- When/to whom might we sell?
- Do you have relationships with lenders for refi?