What is A Momentum Deal vs. Reposition Deal in Apartment Investing
In apartment investing there are differences on the types of deals available. There’s generally two categories: momentum deals and reposition deals. Most brokers will refer to these terms as performing deals or non-performing deals. This article describes the difference between them.
A momentum deal is when a property is operating well and producing cash flow. Net operating income (NOI) is positive and after the mortgage is paid, there’s cash flow. The property typically has occupancy above 90% or market average. These are easier to finance. The lender can see it’s operating well enough to cover expenses and mortgage. Lenders like to see a debt coverage ratio minimum of 1.2.
When starting in apartment investing, it’s best to begin with momentum deals. These deals allow you to learn on a well operating property. You won’t have extra challenges associated in a reposition deal.
A reposition property is operating below its potential. It should be purchased at a discount. You want to realize higher gains for the extra work and increased risk. It’s typically due to low occupancy. The low occupancy does not bring enough income to cover expenses. These deals may be cash flowing very little, break-even or cash flow negative.
Mismanagement and/or other factors may contribute to the property under-performing. Higher than average expenses can also be a cause. There may be excessive money spent on payroll, materials or other expenses that need better management.
Financing options are limited. Conventional lenders consider a performing property to have minimum 85% occupancy. If it’s less they’ll decide it’s too risky, refusing to lend. Bridge lenders or hard money lenders operate in this territory. They look at the deal and borrower’s experience to make a determination to lend. They want lower leverage. Down payment requirements can be 35% to 40% or more, depending on the deal. Their loans are short term and vary from 1 to 3 years.
Beginners should not start with this type of deal. These are deals experience investors are suited for and may desire. There’s potential for greater investment returns due to the higher risk. They have the experience and systems to turn the property around and get it performing.
Know the Deal
When considering apartment investing, know if it’s a momentum or reposition deal. Analyze accordingly and adjust your return on investment to suit the deal. If you’re starting out and a broker is sending you deals not compatible with your experience level, let them know. Don’t waste time looking at a property that’s going to take a lot of work to get it to cash flow, just because the price looked good. Unless you have years of experience stick to momentum deals.
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