My posts keep getting blocked so my tips have been a bit backlogged. Trying my best to not include any outside links or anything that can be taken as advertising.
#4
Not all technical people are the right underwriter for you. Just because someone is an engineer or an analyst doesn’t mean they have the same risk tolerance. If an underwriter is okay with assuming 7% rent growth but you want 4%... you’re not on the same page.
My advice? Develop a basic understanding of real estate numbers so you can vet your underwriters and make sure you’re working with the right partners who have the same risk profile as you.
I’ve seen underwriters self-label as “conservative” only to uncover that they were way more aggressive than I was. I’ve seen “aggressive” underwriters build in double the amount of cushion. Don’t assume everyone is defining these terms in the same way and educate yourself a bit to better protect your investment(s).
#5
A single number that you hard enter and then forget to change… can drastically impact multifamily returns. Even experienced underwriters (myself included) make the mistake of forgetting a cell.
My advice? Every time you want to underwrite, use a BRAND NEW copy of your underwriting model (hopefully you have a clean copy). That way you minimize your chances of letting a previous deal’s hard-coded numbers ruin your projections.
#6
“I’ll buy for $100k a door, do $20k a door of renovations, and sell for $150k a door.”
Underwriting can be overwhelming but don’t oversimplify the process. You cannot mold a complex skillset to your comfort level. I promise you that modeling isn’t rocket science but using one formula to buy a multi-million dollar asset is borderline dangerous.
If underwriting was as simple as 100 + 20 < 150, wouldn’t everyone be real estate millionaires? Rules derived after multiple deals and a meticulous understanding of your local market are powerful and that’s the ultimate goal.
If you want to buy an apartment complex with one formula to start though, you might as well be gambling…
and flying to Vegas is a lot easier than buying real estate.
#7
A mastery of numbers is useless without an ability to communicate findings. I learned throughout ten years as a data scientist that most of the world doesn’t care about your r-squared value. 😥
You know who cares about technical jargon and statistics lingo? Other data people… but unless you plan to only invest / work with data people, you need to learn how to distill complex analytical findings into plain English.
Data storytelling tip: Use simple charts and graphs. Only pie, donut, line, bar, or area charts. Nothing 3D, nothing that has complex animation, nothing with shadows and arrows and highlights.
You may think more data points and colors make your points clearer but in reality, more is distracting and confusing.
#8
Differentiating rent increases in your underwriting is important. A lot of investors lump “rent increase” as one percentage but it’s multiple strategies rolled into one. Here’s an overview of the differences.
Rent today = rent collected today (usually by the seller on the T12)
Additional income = additional charges you can pass on to tenants: Pet rent, RUBS, laundry, package lockers, carports, late fees, etc.
Market rent = rent you COULD collect today with little to no renovations. The difference between rent today and market rent usually exists because the current owner decided not to increase their unit rents as much as market rents increased. Over time, this compounds and leads to “loss-to-lease”.
Rent premiums = the additional rent increases you’d be able to get with a significant transformation of the unit / property. This is usually the pro forma rent that you’re aiming for in your underwriting.
