Deal or No Deal: The Underwriter's Playbook ✍️

[Jorge Abreu]

Analyzing real estate deals is like deciphering a puzzle of numbers and projections. It's crucial to understand the financials and market trends to gauge the potential value of a property accurately.

One key aspect is the cap rate, which is a big player in determining a property's value based on its income compared to its price tag. For instance, if a property worth $10 million brings in $100,000 per door, the cap rate is $100,000 divided by $10 million.

To quickly size up a deal, I rely on the 1% rule: if the price is $100,000 per door, I expect to see at least $1,000 in monthly rent. It's a handy rule of thumb, but detailed analysis is crucial for precision.

Let's dive deeper. The going-in cap gives us a sneak peek into future profits by dividing the trailing 12-month net operating income (T12 NOI) by the purchase price. We aim for a target cap rate, say 6%, aligning with our investment strategy.

Here's an example: if a property yields $1.2 million in income and costs $10 million, resulting in a 6% cap rate.

Then there's the adjusted going-in cap, factoring in potential changes in income or expenses. For instance, if a property's T12 NOI is $500,000 with a $5 million price tag, but we expect income to rise by $50,000 and expenses by $20,000 annually, our adjusted cap rate becomes 10.6%.

Yet, underwriting deals isn't without its challenges. Many overlook renovation costs or underestimate renovation timelines, impacting vacancy rates. Proper research and budgeting are crucial. It's also essential to stress-test assumptions, ensuring the deal can withstand tough scenarios.

Using models or spreadsheets streamlines the process, but mastering underwriting takes time and experience, evolving with market changes.

In short, underwriting involves dissecting financials, considering market trends, and stress-testing assumptions. Avoid common pitfalls, embrace continuous learning, and scrutinize deals to ensure their viability before diving in.

Let's go!💥