How Do We Mitigate Risk?
The demand for apartment communities is very high. Investors are often willing to pay low 5’s to low 6 cap rates for Class B and C communities. Bidding frenzies can make it easy to get caught up in “the market” and overpay – even for sophisticated institutional quality investors who are consistently being outbid by other investors. Our discipline ensures we never get attached to a deal. We also believe in a conservative investment approach to factors we control and even more conservative in the expectations we do not control such as interest rates; rent growth; etc. We believe that when we buy assets that generate strong double-digit cash flow, based on current market rents, we will be in the best position to weather market changes.
Strong In-House Management
DLP Property Managers provides DLP Capital with the significant advantage of having a
Long-term, Non-recourse Debt
A key factor in real estate investments in the utilization of debt. DLP focuses on utilizing debt in a relatively conservative manner; typically with a maximum of leverage of 75% of costs at the time of purchase. As a whole, DLP’s real estate holdings have an LTV of about 55%. In addition, to utilize leverage conservatively, DLP focuses on locking in long-term debt with no recourse to investors. This allows cash flow and investor returns to have no direct effect from rising interest rates.
Loan to Value Ratio: When originating real estate loans; One of the most important metrics is the loan to value ratio. Traditionally, banks will not loan more than 80-90% of the value of a residential home to ensure the borrower has “skin in the game.” In the event of an economic shift where home prices drop, banks have a cushion if they need to foreclose on the property. The same is true for real estate investors. Leaving an equity cushion in the investment allows investors to account for unforeseen changes in the economy or the property, such as a higher than anticipated vacancy rates. At DLP Capital Partners, for most of our loans, we limit the LTV for third-party borrowers to 65%. We also limit total borrowing to 80-85% of the cost of the property.
Cash Invested by Borrower IE Loan to Cost: Arguably, the #1 determination of the success of a loan is the cash invested by the borrower. We believe strongly in the “old school” principles of lending; 20% down by the borrower drastically decreases the risk of default. On average DLP funds, less than 75% loan to cost; requiring the borrower to invest 25% of the purchase price plus 25% of the renovation costs out of his/her pocket at the purchase of the property.
Title Insurance: One of the risks in real estate investing is a “clouded” title. Investors want to be sure the title is free of any outstanding litigation or liens. When investing in private notes, it is important that to be in the first position, so no other lenders have claim to the property before you. Working with a reputable title company and a partner who can help with all the administrative work can be beneficial if you do not have experience doing this yourself.
Hazard Insurance: Our private note investors are secured through hazard insurance in the event anything happens to the property, such as a fire or flood. The insurance payout goes to the investor before the property owner can receive the funds.
Escrow of Rehab of Funds: When DLP Capital Partners lends money to any borrowers outside of DLP Capital Partners and its executive team, all rehab funds are held in escrow with DLP Capital Partners and are only released after each stage of the renovation is complete.
Professional Project/Renovation Management: DLP Capital Partners controls the renovation by employing professional project management and/or third-party inspectors to oversee the renovation, ensuring the work is completed to our satisfaction and that our investors are exposed to very little risk.
Strong Borrowers: When DLP Capital Partners lends capital to investors, a thorough financial and credit analysis is performed. DLP Capital Partners focuses on lending to experienced, seasoned, and financially stable borrowers.
Risk Disclaimer: This investment opportunity has certain inherent risk factors. These investments are not backed by the FDIC.
Note: This how DLP Capital Partners Mitigates Risk is only for the DLP Lending Fund and DLP Income & Growth Fund