Underwriting concerns/formula more of a deep dive.

[Michael Randle]

Good Afternoon BP,

I am currently working on getting a feel for underwriting and I am crunching numbers on multiple properties. The wife and I closed out or real estate and we are look to re-invest in the first to mid point of 2020.

The issue I am having is in underwriting and I am wondering if I am being too conservative. My underwriting is as follows:

Rent
-10% for VacRate (changes depending on the market)
-10% PM (changes on size of property or what is stated in the OM)
-10% Repairs
-10% CapEx
-P&I/Taxes

= Cashflow

This is the basic building blocks of my underwriting and I expand upon these.

Such as looking for ~1.25 DSCR for bank underwriting purposes and time to 6 months worth of reserve.

The issue is that most properties listed are not reaching the very basic 1.25 DSCR that would be required by lending institutions with current asking price and NOI. Because of this I am questioning that my underwriting might be too conservative and I am really pricing myself out of some deals.

So my question to the community is as follows, given the above information am I too conservative with my underwriting? If I am what numbers do you use?

If I am not being overly cautious and it is the seller who has unreasonable expectations. What do you successful buyers do to get the property more in line with lending standard or your own personal standards? At what time during the process do you start to nudge that price down etc?

[Greg Dickerson]

@Michael Randle you should be underwriting the deals based on actual expenses supplied by the seller or listed in the OM. Expenses will vary greatly depending on the property. Also the DSCR will vary and can be increased using more equity and interest only debt which is how a lot of more aggressive deals are getting done.

Always best to air on the side of conservative as you will always have unexpected things pop up no matter how thorough your analysyis.