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MortgagePoint » Your Trusted Source for Mortgage Banking and Servicing News 56 May 2024 F E A T U R E S T O R Y » Supply and demand dynamics: We are coming off of a construction boom where record numbers of units were built in the aftermath of the pandemic, and are delivering now and will con- tinue to do so in the coming months. As developers deliver units, they will be motivated to fill up their buildings, even if it means cutting rents in order to do so. Oversupply of properties in a given market can significantly impact the ability to maintain higher rents, occupancy, and, ultimately, property values. Understanding what other properties are coming online and targeting similar renters in your mar- ket is essential for making informed investment decisions. » Interest rate changes: Interest rates play a crucial role in real estate financ- ing, and rates are higher today than in many years. This increase in interest rates will lead to higher exit cap rates when you go to sell and mortgage costs at acquisition. This should reduce property values today as buyers need lower all-in costs in order to make a return with higher expected interest expenses and higher expected final exit cap rates if we are in a "higher for longer" environment. Investors should conservatively underwrite how interest rates will affect their investment. What Should Investors Be Considering When Purchasing » Capitalization: The biggest mitigant to all of these risks is having the right capi- tal stack. Having moderate leverage and adequate liquidity reserves will allow an investor to weather market volatility or any capital requirements that come along. Particularly having fixed-rate debt, with plenty of time before maturi- ty and adequate reserves to manage the inevitable surprises. » Location, location, location: The adage holds true that location is crit- ical to real estate investment success. Consider the property's proximity to amenities, transportation, schools, and employment hubs. Research the neighborhood's growth potential and overall desirability. Well-located assets will typically always have buyers. Now is the time to look for premium loca- tions at more reasonable prices. » Market pricing and financial anal- ysis: The best way to mitigate risk is to buy at a low basis relative to other properties in the market, and to buy at a price where your income at current market rents can generate adequate cash flow even with current mortgage rates. That way, even if market prices drop in the meantime, you will be able to maintain operations until condi- tions become more favorable. » Understand your risk tolerance and execution capabilities: Define your risk tolerance and investment goals be- fore shopping for properties. Do you seek to renovate a property to generate short-term gains, or would you like to purchase a stable property for long- term stability? That will guide your property selection and investment strategy. Be honest with yourself about your ability to execute on and tolerate the risk inherent to renovations or a value-added business plan. » Establishing an exit strategy: Develop a clear exit strategy before making an investment. Whether it is selling a property for capital gains, refinancing, or holding a property for rental income, having a well-defined exit plan with conservative cap rate assumptions will help you make informed decisions throughout the investment lifecycle. » Network and build an expert team: Build a team of real estate profes- sionals, including real estate agents, property managers, and construction experts. Seek advice from experienced investors who can provide valuable insights based on their own successes and challenges. Conclusion D espite the current market volatili- ty, there is a significant amount of potential in today's market environment. It is in times of market dislocation and lack of liquidity that the best deals are made. Investing at a time with fewer competing market participants allows for better pric- ing, which is the ultimate mitigator of risk, assuming you have the team and diligence in place to manage typical pitfalls. We are coming off of a construction boom where record numbers of units were built in the aftermath of the pandemic, and are delivering now and will continue to do so in the coming months.