Underwrite difficult multifamily deals with these 7 easy steps

[Justin Goodin]

Hey BP fans! I see a lot of discussion here about commercial multifamily underwriting and questions around this topic. 

If I had to narrow down commercial multifamily underwriting into 7 steps, here's what I would say...

1. Determine In-Place Income

Using a rent roll, determine the in-place rent amounts the property is collecting.

2. Input Operating Expenses

These are expenses needed to run the property. Marketing, payroll, and real estate taxes just to name a few.

3. Model Your Business Plan

Are you doing renovations and increasing rents? Are you going to start valet trash in month 6? Accurately model your business plan in the spreadsheet.

4. Capital Expenditures

This is your rehab or construction budget to fix up the property.

5. Growth Rates & Assumptions

Determine year-by-year inflation rate. Input accurate numbers for physical vacancy. Determine the exit cap rate.

6. Debt & Equity

Which loan product is best for this asset and business plan? Where is the equity coming from?

7. Determine Valuation

Based on the level of risk the deal presents and the returns you are seeking, determine the correct purchase price.
- -
Step 7 is key!

❌ As the underwriter, you are not trying to get to the seller's asking price.

✅ You are backing into a potential price that can deliver your desired projected returns sufficient for the level of risk the deal presents.

What would you add to this 7-step process to underwrite a commercial multifamily property?