3 Things To Keep In Mind When Underwriting Multifamily Deals

October 31, 2020

We started TermSheet because we saw for ourselves the hoops that real estate investors were jumping through to manage their deal process and combine that with data. We thought that we could build a world-class product that helped other real estate investors like us while not charging an arm and a leg for it. Given that we have spent a lot of time looking at deals and in particular multifamily deals, here are a few things to remember when evaluating your next deal.

1. Proforma numbers are not Actuals

If you are anything like me, when you receive an OM you quickly scroll down to the financials section to get a high-level overview of what's going on at the property and if the asking price is justified. Once thing you have to be careful of is ensuring that the numbers you are looking at are In-Place income and expenses and not proforma numbers. Don't get me wrong, proforma numbers are great and an important part of your investment, but if you making an acquisition be sure to look at what the in-place numbers are because that's the property that you buying.

While you're there, also be on the lookout for somewhere near the Cash-Flow line where they may add back in principal reduction as part of the net cash-flow. While you are clearly receiving the benefit of principal reduction, I don't consider that part of monthly/yearly cash-flow, it should be part of your IRR and equity multiple, but its not like you can put that cash into your pocket each month.

2. Deferred Maintenance

Deferred maintenace refers to any capex that has been delayed but would be critical in order to maintain the property in good working order. Deferred maintenance can come in the form of optional items that while important, may not be crtiical such as re-paving of common roads. It can also come in the form of more serious capex such as roofs, A/C units, foundation issues.

These are all costs that you will have to incur upon taking over the property and should therefore be properly acounted for in your budget.

3. Property Taxes

As I mentioned in point #1 you should pay attention to the in-place income and expenses, you also need to account for the fact that you are likely purchasing this property for more than the previous owner bought it for and therefore will likely receive a higher assessment. In some states this may not result in a significant increase because the property has likely been receiving re-assessments along the way, while in states like California as a result of Prop 19, you may see a huge hit in your taxes.

Be sure to find the mill-rate for your county so that you can properly estimate what those may look like.

If you're like us and believe that your real estate data should be unlocked and super-charged, come learn about what we're doing, schedule a demo.

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