Underwriting multifamily properties am I being too conservative?

[Philip Hernandez]

Hi all, I'm in the middle of negotiations/underwriting for a 12 unit multifamily property in Ohio.  Property is currently bringing in $8400 a month.  We are looking at value add that would bring the property up to $10,500 a month and higher over the next 5 years.  In our underwriting we've ended up calculating 58% for operating expenses, which hasn't left us much after the debt service for our potential purchase price of 650k.  My question is, if I am being too aggressively conservative in my underwriting, and potential making a good deal look untenable...for other multifamily investors in midwest markets, how high do your operating expenses and up being.  It's been easier for me to calculate on single family /duplexes that I've purchased, and I'm nearly in analysis paralysis land with this one.

[Zachary Inman]

In my experience, 58% is on the higher side of the spectrum for a midwest 12 unit. I would feel comfortable underwriting in the 40s, but you always have to adjust depending on the asset, the micro/macro market forces, and your team's track record. 

It depends on your risk tolerance. No one has a crystal ball, the expenses could end up being higher or lower than your projections because of unforeseeable elements.