Another common question I hear from current and potential investors is how BAM deals with finding deals at this point in the cycle. Similarly to what I’ve said about how to succeed in this industry, the answer here is simple -if not easy.
So what lots of investors want to know is: with it being late in the current cycle, how does BAM find great deals, still find solid returns, and find assets that can be purchased for a price that will guarantee a given return? The first part of my simple answer: be really careful!
At this stage in the cycle, BAM’s position is that we only want to buy higher quality assets which also have a lower risk profile. Specifically, that means assets like B+ and A/A- properties, typically built in 1995 or newer. To compare, at other stages in the cycle we might be buying older properties and doing heavier value-add. Right now, the spread on the cap rate between the older, value-add properties and the newer assets is very thin – they’re very close spreads. If you want to be in this a long time, take less risk, but also offer great returns, it just makes sense to buy the newer assets.
Now, if you’re wondering ‘does that potentially limit your upside?’ – the answer is yes, it does. However, we’re only looking for deals that have a high probability of returning a 14-17% annualized return. So, if we can first reduce the risk profile we’re obeying BAM’s first rule: don’t lose money, followed by rule #2: remember Rule #1. Then, the question is how do we get yield off that capital? The plan is we buy newer, nicer assets that we don’t mind holding for ten years if we have to (even though we might rather sell or recapitalize in year five). In the meantime, if economic circumstances change or we experience a recession, then we have higher-quality residents in a newer, higher-quality asset that we don’t mind owning for the long term.
That’s the simple answer for how BAM finds great deals at this point in the cycle: be really careful, look for quality assets that provide a solid yield, and look to reduce the downside rather than maximizing the upside.