Considerations when Underwriting Multifamily Syndications with Rob Beardsley

CREI Partners

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In this episode, Wayne talks to Rob Beardsley. Rob oversees acquisitions and capital markets for Lone Star Capital and has acquired over $350M of multifamily properties. He has evaluated thousands of opportunities using proprietary underwriting models and sold over 10,000 copies of his book, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles about underwriting, deal structures, and capital markets and hosts the Capital Spotlight podcast, which is focused on interviewing institutional investors.

Rob’s areas of expertise include

Multifamily Underwriting: Basic overview, key metrics, sensitivity analyses, stress tests, comparables, cap rates
Partnership Structures: How to structure deals with investors, waterfalls, preferred equity, matching your strategy
Raising Capital: How to partner with institutional investors, how to form joint ventures and co-GPs
Financing: Overview of debt options for multifamily, matching debt product to investment strategy, loan term nuance

Topics on Today’s Episode:

Rob got an early start in real estate through his parent’s brokage firm that focused primarily on construction and fix and flips. This led Rob to dive into multifamily as the best way to accumulate wealth and assets.
At 20 years old Rob, alongside his partner Kent Piotrkowski, started Loan Star Capital about 7 years ago. In that span of time, the firm has acquired close to $400M worth of multifamily properties.
Growing up around real estate and his father’s mature conversations contributed immensely to Rob’s entrepreneur mindset and his ability to lead and inspire others.
You really do not understand business until you are in business. Higher education is only textbook knowledge, real-life business is the best teacher.
Risk factors are so important when starting a business, however the stakes become higher when you have a family and other responsibilities. The best time to take a risk is early in life when liabilities are less.
Being Bullish on Houston makes sense because it’s a diverse city. Houston is not only an oil city, but also the largest medical center in the world and the busiest port in the US in terms of foreign tonnage. It is often overlooked, making it one of the most accessible large markets to penetrate.
Insurance is one of the biggest obstacles in today’s Houston market. Not to mention that interest rates have affected all markets.
Rob and Wayne discuss the main factors behind high insurance premiums. The spike of property insurance in Houston has been caused by:

1. Many hurricanes have made landfall, and repetitive major losses have followed.

2. The number of carriers that are willing to insure in Houston has decreased.

Rob talks about what the risk is in today’s market. Being mindful of risk is key. Consider whether a value-add deal will yield the same return as a clean stabilized deal. If you are not getting paid for the risk, it’s better not to take it. There are cycles in the market that will recenter prices and insurance costs.
Operational headwinds are likely to approach in the near term, such a recession which will impact collections, rents, occupancy. This makes it critical to be tighter on proforma rents, growth assumptions and wider exit cap rates.
Good Underwriting fundamentals are key when considering Cap Rates. Taking the current market cap rate and widening returns by 50 basis points (0.5%) is a good strategy.
Debt is the biggest strategic difference, focusing only fixed rate permanent financing. No more bridge loans. Doing 70% LTV Ration is typically the sweet spot, where there is a long-term view but short term enough to be an opportunistic seller or refinance into a better capital market.
In today’s climate, it is hard to know exactly where the market is since very few deals are getting done.
There is so much liquidity in the market right now that we are not going to see a deep and prolonged buying opportunity. Buying when the market is going down will be the best option.
What is the best deal you’ve ever done? It is the one you don’t do. The best deal is walking away from the wrong one. Its better to walk away from that wrong deal that can break you.
On the retail side of capital raising, private high net worth investors, we are still seeing a sustainable amount of capital, despite a 75% transaction decline. Capital is available but there are few places to put it.
On the institutional side, however, it is completely dry since institutional investors pay attention more to “headline risk” and tend to operate in unison, waiting to see what the next person will do.
The Dallas market is very competitive and forces you to spread your numbers when underwriting.
Rob talks about his book, “The Definitive Guide to Underwriting Multifamily Acquisitions” which has sold almost 15,000 copies. He felt there was a gap in the industry to show the true process of underwriting multifamily from someone doing it in real life.
Rob recorded the audio version of the book himself to take advantage of the opportunity to highlight his personality and build a relationship with the audio listener.
When underwriting a deal, it is important to leave room for failure. If you are aggressive on some parts and conservative on others, it can balance out.
There are 2 ways to stretch the numbers in underwriting. 1. To get more aggressive on assumptions. 2. Accept a lower return.
However, #2 is less likely to excite the investor hence over-promising by deal sponsors.
Under-promising and over-delivering is the name of the game. This is the way you win in the long term.
Rob’s lesson learned: It is best to have your team in place prior to getting the property under contract. It is a mistake to put the property under contract and then go look for a managing partner.
Rob’s proudest moment was when they closed their first deal in Houston. It validated everything he had been working for. He was prouder closing the deal than selling it.