Underwriting a multifamily property is a complex task. The nuances of each property, their risks, and their prospects for success are different. In fact, there is no “one size fits all” type of underwriting and property. The process, however, is not impossible to understand. Here are the key steps that you need to take in order to successfully underwrite and value a multifamily property.
The first step in any investment transaction is defining the asset’s value. In a multifamily deal, this becomes especially important since you will be acquiring properties that may have different characteristics and risks.
Start by understanding that the price you pay will be influenced by both the acquisition’s capital and its risk elements. You may want to begin by asking yourself: What is the current value of the property? What is the future value of the property? Setting a range and boundaries between the asking price and the fair value of the property per your calculation is the first step that you need to go through.
This typically is a combination of valuation and the data you will be gathering about the property. We will talk in detail about the multifamily cash flow analysis and property valuation process in greater detail below. You will most likely start building more confidence as you repeat these exercises on multifamily deals that you will be scanning and qualifying/disqualifying. Traditionally this work involves reviewing information in an offering memorandum, understanding rent comparables in the region of the opportunity you're looking to invest in, sales comparables.
Once you have determined the asset’s value, you will have to make assumptions about the property’s future performance. In order to complete this part of the process, you will have to understand two things: Why you are investing And why you are investing in this deal.
Property investors may invest in multifamily properties for a variety of reasons, but the most common one is to generate a steady stream of income. However, an investor will not purchase a property expecting to make a single dollar in profit. Instead, the investment is made with the expectation that the income stream will be profitable. Investors will purchase properties that have a reliable stream of rent, and they will purchase properties that are located in an area where there is a demand for rental units.
Sale Assumption
Exit Assumption
This process is one of the most critical parts of your deal analysis. Typically, over a period of time, you have to build a sophisticated financial model that you use for evaluating multifamily investment opportunities that comes to your desk for evaluation.
The process involved is as follows:
Understanding the In-place Revenues and Rent Roll Unit Mix and its upside potential. You can by analysis a rent roll document and structure the information in a clean format.
After you have determined the project’s value and you have determined the rate of return that you would like the deal to have, you will have to estimate your property’s cash flow. This is by no means an easy task. The amount of time required to complete this step will vary depending on the complexity of the deal. In most cases, however, you will want to hire an experienced real estate appraiser to do the job for you.
Once you have determined your project’s cash flow, you will have to solve for capital and risk. Capital is defined as the amount of money that you have at risk when you make an investment. It could be your savings, your savings account, or your assets. It could also be your chattel guarantees or a mortgage you have on your property.
Risk is defined as the exposure to loss that you will have when you make an investment. It is the chance that a particular investment will fail. The nature and the amount of risk in a particular investment will depend on a number of factors, including the investment’s capital.
Multifamily property investing is complex. It requires a thorough understanding of the market and the properties you are investing in. It is important to understand the fundamentals of property valuation, as well as the principles of project finance. It is also important to communicate with your investors. The best way to communicate is to use common business practices such as reporting, budgeting and measuring performance.
If you follow these steps, you will successfully purchase and value a wide range of properties, allowing you to choose the right deal for your investment strategy.
