UNDERWRITING MF DEALS

WARNING- I'M ABOUT TO NERD OUT- I think one on the most complex things about multi-family investing is the underwriting . There is many moving parts that needs to be accurate. For example, the market rent comps, rehab cost, and financing are some of the components that need to be accurate and verified for the under writing (and ultimately the offer) be accurate.

With that said, I learned so much this week. I learned to coordinate with multiple contractors to get a rough estimate of interior and exterior rehab cost. The rent comps need to be as close to the subject as possible (same part of town, same number of units, same amenities, and built in same decade), but sometimes it will be difficult to find a comp that meets all those criterias at the same time. Those are the times that you need to make a judgement call or confirm with your boots on the ground property manager.

Another thing I learned was to confirm with your lender on the terms because terms might change from deal to deal. For example, I underwrote (for fun) a 80 unit deal, but I made the mistake of underwriting using the financing terms of a smaller 20 unit deal. My offer was way too low. I learned that bigger deals often lets you leverage debt with lower rates, longer amortization years, and often "interest only" terms on the first couple years which lets you make more aggressive offers which are more than likely to get accepted by the seller.

Moreover, pay attention to how many of the the units (in the Offering Memorandum or you need to confirm with the decision maker). Assuming that all of the units need to be updated when they don't will cause your offer to be too low. Under estimating the number of units that need to be updated will cause you to either renegotiate the deal at closing which can destroy your reputation over time or cause you to lose money (which is even worst).

Additionally, it is important to keep in mind rules of thumbs. For example, operating expenses should be 50% of the rent for a C condition property. If it fails to do so it is worth while to look into the why. Also, you should be concerned if the insurance expense for the property is more than the market average. Was there a previous fire at this property to make the insurance to go up.

In conclusion, I think underwriting is a beast of its own. I see myself doing my own underwriting on my first couple of deals. However, as I get to doing bigger syndication deals I look to partnering up with someone who specializes in the underwriting and is a spreadsheet guru, but has a more reserved personality so we compliment each other's strengths. At the end of the day Michael Jordan was limited to being only a scoring champion before he met Scottie Pippen. MJ didn't win championships until he began to trust his teammates and leverage "teamwork".