Streamlining Multifamily Deal Analysis

[Anthony Blanco]

Hello BiggerPockets community,

I've been searching the internet lately, sifting through a multitude of deal analysis tools, Excel templates, proformas, and DCFs, all aimed at deciphering the viability of multifamily properties. Yet, amidst all the resources, I find myself overwhelmed and uncertain of where to start.

My objective is simple: I want to master the art of underwriting multifamily deals. I aim to utilize other people's money to invest wisely in buy-and-hold multifamily properties. I understand the significance of key metrics such as IRR and CoC in evaluating the potential of a deal, but the abundance of information out there is making it challenging to find a straightforward, user-friendly solution.

What I seek is a singular, comprehensive tool—a master template, if you will—that I can consistently rely on from deal to deal. Something that cuts through the noise and provides me with the essential metrics necessary to assess the quality of a potential investment quickly and efficiently.

I'm open to suggestions and advice from those who have navigated similar paths. What tools or templates have you found most useful in your multifamily investing journey? How do you streamline your deal analysis process while ensuring thorough evaluation?

Thank you in advance for your insights.

[Dennis McNeely]

You may be getting caught up in the paralysis of analysis. First decide the area(s) of interest to you as an investor - both geographically and the type of investment (SFR, small / large multi, storage, etc). Give some consideration to the amount of money you want to invest for a down payment plus any closing & renovation expenses here too, although if you find a sweet deal you can find outside money to extend your reach.

Next run the property through a quick analysis. For residential, compare the actual rents (*not* rents suggested in a proforma) with properties currently for rent and with historical rents for similar properties using sites like Zillow and Rentometer. Once you're comfortable with the total gross rent you can charge, multiply the total monthly rental income by .95. This allows for a 5% vacancy, and gives you the effective rent.

Next, multiply the effective rent by .55. This allows for 45% of the effective rent to be spent on all your expenses (taxes, insurance, management, common area utilities, etc. - but not your mortgage payment), and gives you the net operating income (NOI). If you're comfortable with a smaller percentage for expenses, change this part of the calculation - just realize you're ratcheting up your risk exposure on the property.

Divide the net operating income by the prevailing interest rate (5%? Hey, I can dream!) to get the total amount of debt the net operating income can support. Divide this number by .75 or .70 to reflect a down payment of 25% or 30% respectively, and compare that result to the asking price.

All the above takes about 10 or 15 minutes max - even using just a calculator. The majority of that time is spent verifying rental income for the unit mix in the property. Congratulations - you've just eliminated the vast majority of properties you choose to evaluate. Once you've done enough of these, you can decide if you want to invest even these 10 or 15 minutes - you'll recognize which properties are beyond the realm of reason and discard them immediately.

Now take the analysis one level deeper by looking at the property's current condition. How much do you anticipate spending for renovation, and can this money come from the NOI or will you need to spend it out of pocket immediately after acquisition? Does the property lend itself well to other income streams - paid laundry, storage area, or carports for example? What will it cost to make those income streams happen?

Also, keep in mind that you should have enough profit (NOI minus principal and interest) to be able to realize a reasonable rate of return and still be able to set aside some money for capital expenditures - for example, money for new roofing, paving repairs for drives and parking areas, etc.

In the end, you have to get to the other side of analysis though. Put that calculator down and pull the trigger.

Good luck with it!