ONLY 50% leverage, smoking DEAL

[Scott Morongell]

You're a passive investor chomping at the bit to invest passively. You see a headline come through on your email with an offering - ONLY 50% leverage, smoking DEAL! But is it? 

As a syndicator and also passive investor myself I see this time and time again today with the market relatively close to the top. A sponsor (syndicator) is dying to tell you how conservative they are because of the low leverage. What they neglect to tell you is that their DSCR is slammed to the floor at 1.25 (traditional agency, is diff for bridge and local banks). This essentially tells me that they're willing to pay about (20-25%) premium more than it's really worth. In order to pay such a premium for a value-add deal which is what most sponsors are buying they need to be in a fantastic market where cap rates will stay lower on an exit with a rent bump on rehabbed units somewhere around 300+. I haven't seen a deal have 300+ rent pops and if it did, I surely wouldn't underwrite to it.

Passive investors beware. Just because a sponsor is telling you how conservative the leverage is doesn't mean it's a great deal. Debt service coverage ratio is more important and should be looked at in conjunction with leverage on a deal. There are many other factors to determine if a deal makes sense to passively invest in but this will give you a good start. If you're wondering what those other factors might be you will want to look at (by year or month) the assumptions they made for: rent growth, expense growth, delinquency rates, additional income in place and being added, exit cap, debt placed on deal, potential debt prepayment, RUBS, etc. Two of the biggest factors that move numbers on a deal are rent assumptions and exit cap.