How do FIG projects perform on average?Apr 01, 2021
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When we say "FIG projects", context is important. Our developments can range anywhere from 100-300 doors and can be chopped up into phases of anywhere from 30-60 different fourplexes.
If you were to look at one of our projects like it was an apartment complex... where you've got one ledger that lets you track all of the expenses. It would all average out. FIG projects are a little different than that though because investor Bob could have a slightly different experience than investor Jane. One may have great tenants that stay forever while the other gets a couple of crappy tenants. And we all know what a bad tenant can do to a property! It can take a bit of time to recover from that.
A macro-level of how FIG projects perform as a whole
When you look at a proforma, you have to remember that it's a projection. Our team is often looking at the desired market 18-24 months in advance. Our goal is to have a very educated estimate of what that market is going to do by the time we're ready to tell investors about the project.
There are several ways we can do this. We can look at the market for rents, we can look up tax rates, we can look at insurance. Anyone can do this and even with their best effort, there's only one guarantee...that we're going to be wrong on every single one of them.
That doesn't mean the proforma is wrong. But it does mean that some categories are going to be high, some low. If you do a good job, they tend to average out in the end. When you blend it all together, it ends up being about what an investor would project it to be.
We've also seen this happen a couple of times on the extremes. There was one project in Texas that wasn't quite as good. The lease-up took longer and there were a lot of different moving parts. Yet once we did get everybody leased up, the cap rate ended up being pretty solid.
One of the reasons for this was the property tax bill came in significantly lower than we originally anticipated. So even with a longer lease-up and about $150/door lower rents due to some market conditions, it still ended up being a wash at the end of the day. If you're patient and work through any surprises that come up, things tend to work out.
Another example can be seen in one of our Utah projects that did significantly better than the proforma. Everybody was calling us back asking for more of those. Of course, we can't guarantee any more of those, after all, the rents ended up being $100 higher per door than we originally thought.
An interesting thing there is that property taxes are going to find the higher rents eventually. So you can expect an increase even as you gain a higher positive cash flow. Your tax bill will go up a little, but it does net you more positive cash flow.
Over time, we've noticed that the best results come for the investors who are patient, and who watch those interest rates. If the interest rates are high, but your cash flow is there, you know that investments going to work because you've got a worst-case scenario there. And if the cash flow works on a worst-case scenario, you know that typically you can only make it better over time.
If those rates dip a half or full percent, that's when you go in, refinance, and lower that mortgage payment. Even without changing everything else, you'd have a better cash flow basis on your property.
So all in all, if you take out a FIG property over about three years, you end up about where we estimated in our proformas. In the short term, some will always look better and some will look worse. Patience is the key in real estate investing, especially when it comes to rental properties.