Multifamily Underwriting is full of opportunities to over or under analyze numbers to determine if a deal is a winner or not.
Michael Becker with Strategic Property Advisors has been both a lender and investor. He has seen the cycle of ups & downs and shared his thoughts on what investors should look for when underwriting a multifamily real estate opportunity.
Rents & Taxes
Value add deals are what every real estate investor is looking for. When you look at rent comps, make certain you are comparing like product. Are you comparing a C class property to a B class property or are you comparing C vs C? If the comparable property not the same class or in the same neighborhood, find a different property.
Taxes are an easy way to upset your deal. You must understand how the local taxes work and will affect your deal. Using the seller tax expense is not reasonable regardless what the selling broker prospectus says.
Exit Cap Rate
Cap rate is the measure of market supply and demand. If there are more buyers than sellers, the cap rate will compress. When the reverse is true, the cap rate will expand. What will our exit cap rate be? A conservative estimate is to increase your purchase cap rate by 10 basis points per year held.
Expecting your exit cap rate to be the same or lower than your purchase is unrealistic, but a nice benefit if it happens.
Rent & Expense Growth
Rent growth is what every real estate investor wants. It is not uncommon to find a property that is under rented with substantial room for rent growth in year one. However, it is unwise to project subsequent years rent growth beyond national averages of 2 – 3 percent.
Expenses should also be projected to increase at similar 2 – 3 percent.
These are some basic underwriting points every investor should consider when underwriting your next multifamily deal.
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