3 Reasons this deal has the most downside risk [Blog]

The first thing we look at when analyzing a deal is its downside risk. 

We look to immediately protect against 2 of the worse case scenarios of investing in real estate deals: 

1 - Loss of Capital

2 - Cash Calls

Here are 3 reasons why our most recent deal, Portofino Club, is the most downside protected deal we’ve ever brought out: 

1 - Debt Service Coverage Ratio (DSCR) 

This is something we dedicated an entire blog post to a few months back and it holds very true for this property. 

In short, your DSCR is the amount of cash the property has after paying its loan every month. 

A bank will usually require at least a 1.20 DSCR, the higher the DSCR, the more cash flow a property has, and the safer the investment is considered to be. 

Most investors would consider a 1.30 DSCR to be a safe range for a value add property. Portofino Club has a year 1 DSCR projected at 1.89 and growing to 2.11 over the hold period. 

By any investor’s standards this is an extremely safe DSCR and puts the property in a strong position to have cash to pay for expenses without having to involve the investors. 

2 - Low leverage

The debt is the biggest risk in a real estate deal. The more debt a deal uses, the riskier investors will see that deal. 

Most would consider 70% debt to be a conservative amount to put on a property, and the less debt a property uses the safer investors would consider that investment. 

Portofino Club has 53.5% debt, the lowest amount I’ve seen on an acquisition. 

This is important for a few reasons. 

First, it means there is plenty of equity to tap into in case the deal needs to be refinanced. 

Second, it gives a substantial cushion for a short sale or to dig into the investors principle to pay off debts. 

With the low leverage on this property we feel great about there being enough equity to weather any economic storms. 

3 - Break even cap rate

One of the first things we want to know when a deal is brought to us is what the deal would have to sell for just for our investors to break even on their initial investment. 

In a primary market we’d consider above a 6.5% Cap Rate to be a conservative place for a break even cap rate. 

Portofino Club has a break even cap rate of 8.10%. A cap rate we don’t even see in rural tertiary markets. 

This means there is more than enough cushion for investor’s principle that a very high upside is extremely likely, and a low downside is extremely unlikely. 

Overall, these 3 metrics are just the surface of what makes this deal exciting to us. These make us very confident in the downside protection of the deal, but there is massive upside to the deal that we believe will over deliver on expectations, like walking into $4.22M of equity right from close. 

If you’d like to learn more about why this deal is the best deal we’ve brought out, submit your info here and we’ll get in touch: https://forms.gle/sBnS3irT5bdhjTWaA