So, what constitutes conservative underwriting?
Conservative underwriting is the process of estimating the value of a property or investment conservatively, or on the low side. Making the numbers work with lower estimates minimize the risk of loss. When acting as the general partner (GP) of a real estate syndication, we practice conservative underwriting to protect the interests of you, our limited partners (LPs). There are several factors we consider when conducting conservative underwriting, including:- The current market conditions.
- The potential for future changes in the market.
- The specific risks associated with property or investment.
How do Rate Caps Help Conservative Underwriting?
There are several distinct types of rate caps available, and the best type for a particular syndication will depend on several factors, including the length of the loan, the interest rate, and the risk tolerance of the LPs. Purchasing a rate cap can help ensure that the LPs are not exposed to excessive interest rate risk. This can help to protect the value of the investment and can make the syndication more attractive to potential investors.A few additional benefits of conservative underwriting and purchasing a rate cap:
- Increased investor confidence: When investors see that we, as GP, are taking steps to protect their interests, they are more likely to invest in the syndication.
- Reduced risk of default: By conducting conservative underwriting and purchasing a rate cap, the GP can reduce the risk of default on the loan. This can help to protect the value of the investment and can make the syndication more attractive to lenders.
- Improved cash flow: By locking in a lower interest rate, we can improve the cash flow of the investment. This can benefit both the GP and the LPs.