Do you want to make a lot of money investing in multifamily real estate? If you do, you must become really good at deal underwriting!
Let’s face it, real estate underwriting is boring and requires a lot of attention to detail that most people hate. I get that. Here’s the problem - I have found that this is THE area that creates the most stress for new investors in the multifamily real estate investing world. It doesn’t matter if you are passively investing in real estate or if you are the sponsor, you must understand how to do it. Dive in and embrace the details and your confidence will skyrocket! I promise.
In this article, I will introduce you to some of our initial screening criteria and give you a link to a one-hour webinar I recently did for Verivest on the topic. That presentation will give you a really good idea of how we underwrite our deals.
Initial Multifamily Underwriting Criteria
Believe it or not, underwriting does not start with a detailed spreadsheet. It actually starts with a little common sense and an exercise that puts you in your future renter’s mind.
It doesn’t matter how good your underwriting is if you aren’t going after the right deal. Here are a few things we look at to determine if a deal is even worth our initial underwriting.
- Floorplans should not be functionally obsolete. An example of this includes three-bedroom, one-bath units that are really small.
- The median income in your one or three-mile radius must be enough to support your projected rents.
- If you are trying to compete with newer, higher-end properties, make sure you can provide in-unit washers & dryers.
- Make sure there is something about the property that you can use to emotionally “grab” a prospective resident. That gives you the ability to obtain higher rents.
- Understand how your property fits into the market now and after you complete your improvements.
I could go on and on, but suffice it to say that as you can see, these criteria focus more on your ability to “understand” the sub-market and your property’s position in it. Notice that we haven’t even talked about underwriting yet. Having said that, I believe this part of the process is arguably even more important than the actual underwriting.
Now that we understand some of the non-quantitative factors we consider, let’s get down to the business of real estate underwriting.
Multifamily Deal Underwriting
Underwriting a multifamily real estate deal the right way requires a lot of attention to detail. Way more detail than I can present here in this short article. Instead, I encourage you to watch a webinar presentation I recently did for Verivest on the topic. The webinar is free and is about an hour long. In it, I review the underwriting process we go through and point out many of the mistakes I see people make all the time. You can view the webinar here. If you have any questions or comments, please reach out below and I will respond ASAP.
If you watched the video, then you know that we are extremely detail-oriented in our underwriting process. I encourage you to follow my process, especially early in your investing career. If you do, there is no doubt in my mind that you will become much more knowledgeable, and as a result, you will become much more confident when determining if you should pull the trigger on your next deal!