Methods to Speed up your Underwriting Process

[Jorge Abreu]

I'm sure this has happened to all of us.

You fully underwrite a potential acquisition. You analyze the T12, look at the comps, plug in your debt terms, and determine your capex budget.

Sometimes, this can easily take 2 -3 hours...

But then you end up with a potential purchase price $8M - $10M off the asking price. Was it worth spending 3 hours underwriting a deal that ultimately doesn't make sense?

Use these 3 methods to speed up your underwriting process.

1. Average Rent

Instead of inputting a detailed unit mix in your underwriting model, take the average in-place rent of the entire property.

On this rent roll, I took the total amount of rent collected for the month and divided it by the number of occupied units. This took me less than 20 seconds.

📈 Total Monthly Rent / Occupied Units = Average In-Place Rent

2. Gross Rent Multiplier

The gross rent multiplier (GRM) reflects the number of years it would take for a particular property's gross rental income to pay for itself.

Most often, the GRM metric is used by real estate investors to ensure a potential property investment can in fact become profitable.

In short, the GRM is more of a screening tool to determine the potential profitability of a real estate investment. Further analysis may need to be used but this can be helpful for a quick analysis.

📈 Purchase Price / Gross Annual Rental Income = GRM

A higher GRM indicates that the property may be overpriced, while a lower GRM indicates that the property is underpriced. The best GRM is generally considered to be between 6 and 10.

3. In-Place Cap Rate

This classic method is determining the value of the property based on the in place net operating income (NOI). This can provide you with a quick valuation so you can compare this to the asking price.

Further analysis will be needed as the current NOI can be manipulated in many ways. Example being, maybe their expenses are abnormally high which will effect the NOI. Or maybe the in-place rents are substantially low and the NOI is low because of this.

By determining a quick valuation of the asset, you judge if the in-place cap rate makes sense for you and determine if the asset is worth looking into further.

📈 NOI / Purchase Price = Cap Rate