In this episode, we have an insightful conversation with our managing principal, Wayne Courreges III, as he dives into the fascinating world of underwriting for passive investors in real estate. Wayne takes us through some of the most important aspects of underwriting and vetting deals from a passive investor’s perspective. He also discusses the role multifamily investors should play behind the scenes of multifamily underwriting.
Wayne leads the investment lifecycle and investor relations for CREI Partners as the lead sponsor and general partner. For more than 15 years Wayne has worked with a Fortune 150 commercial real estate firm leading property management services of 4.5M+ square feet for both institutional and non-instructional clients over his career. Wayne has worked closely with dozens of real estate professionals executing building strategic plans of over $60M and assisted owners through their investment lifecycle. His background in commercial real estate, passion for leading teams, and desire to increase his investor’s and team’s wealth pushed him to start CREI Partners.
Topics on Today’s Episode:
- Importance of understanding return rates and conducting sensitivity analyses
- Assessing projected interest rate increases and exit cap rates
- Emphasizing the importance of trust and relationships with the sponsor
- Importance of timely communication and responsiveness from the sponsor
- Goal of increasing net operating income, NOI
- Increasing revenues through various avenues
- Reducing shared property management expenses by managing multiple properties together
- Building a strong team for investors
- Importance of the rent roll in determining monthly rent and other charges
- Evaluating financials for a specific time period (T-12, the prior 12 months of financials)
- Calculation of net operating income by subtracting expenses from total rent revenue
- Use of income statement for underwriting
- Preference for multifamily investments due to cash flow potential and economies of scale
- Explanation of multiclass waterfall structures for profit distribution
- Importance of GP sensitivity analysis in investor presentations
- Approach to finding on-market and off-market opportunities
- Importance of rent roll and income statement in evaluating opportunities
- Staying conservative and assessing achievability of business plan
- Assessing competitors and listening to the company’s story
- Trusting instincts and passing on questionable opportunities
- Benefits of interest-only payments for distressed properties
- Adjusting the exit cap rate in investment analysis
- Considering different scenarios for interest rates and cap rates
- Analyzing cap rates to determine if they make sense for the deal
- Explanation of property condition reports and working with trusted contractors
- Commercial real estate can have variable hold times. While underwriting for passive investors, we shoot for 5-7 years but that can change based on market factors.
- Investors may have different preferences for cash flow over equity upside or longer holding periods.