Posted over 7 years ago

Most Common Mistakes when Underwriting Multi-Family Deals

I recently attended a 3-day real estate conference with over 800 RE investors from all of the country. One of the most important topics that was discussed was underwriting deals for multi-family apartments. There are so many items and variables to take into account when underwriting a multi-family deal. It’s easy to forget or overlook certain details that can really throw your numbers off and more importantly make you think you have a good deal when that really may not be the case. It’s so important to not only pull your numbers together but also verify that your numbers are correct. Here are some of the most common underwriting mistakes.

Taxes

A lot of people make the mistake of taking the mill rate provided by the broker and using that number in their underwriting. The problem is that number could be old, it may not be the new number when the property is transferred to the new owners or it could just be flat out wrong. ALWAYS call over to the local assessor office to see how they calculate taxes in that city/market based upon your purchase price. You always need to very the taxes for each deal. It’s a 2 minute phone call and it could save you thousands.

Rent Increase

So you’ve determined your value play on your multi-family purchase. You may even have a proven business model that confirms what potential rent increase you can achieve. No matter what figure you assume you can achieve in rent increases you should always only underwrite for 50% of that increase. You want to under-promise and over-deliver in this business especially in a syndication. By using this 50% rule, it will force you to remain conservative in your underwriting and always give you a much better chance of being successful in your real estate deals.

Payroll

Never adjust your payroll unless you can justify it. Sure it may look good on paper but what if your boss came into your office one day and said you are going to do twice the work for the same pay or that your pay was going to be cut effective immediately, how do you think that would affect your performance? How would that affect the performance of the company as a whole? The answer is not well. Of course there are always cases where payroll really does need to be adjusted and there are ways to do so effectively. But for the most part never underwrite a drastic adjustment in payroll right away until you have an effective game plan. It can be detrimental to how the property performs.

Insurance

This is a no-brainer. Get a good insurance professional on your team and make sure you are getting a good and accurate insurance quote for each deal. Some more items to be aware of when it comes to insurance are:

Never assume you can acquire existing insurance, always get your own quote
Always try to get 12-month rental replacement coverage
Aim to get your deductible between 10K-25K