We just entered lease-up on a new building and the rents are coming in too high.
How on earth could I be concerned about rents coming in too high? Isn’t that a good thing for landlords?
Sort of, except that it means I’ve been missing out on deals that I could have been doing.
When we look at a deal, we’re trying to understand how much it will cost to buy and reposition and then what kind of cashflow we can expect thereafter.
The buy price is pretty obvious; it’s whatever we can negotiate with the seller. And the costs of repositioning are reasonably easy for us to estimate, since we’re constantly renovating buildings.
So, the variable that’s kind of unknown is the rents. We try to mitigate this with local knowledge; because we manage tons of similar buildings in the same neighborhoods, we generally have a pretty good sense for where we’ll end up.
But, particularly when it comes to new neighborhoods (for us!), we’re much less confident regarding our estimates. To combat this uncertainty, we opt for caution by using very conservative forecasts.
Which is fine, except when you blow those forecasts away (in this case, by like 20%) and then end up wishing you bought a lot more buildings!