We're gonna do is break down the
multifamily underwriting process into
seven specific steps .
we're gonna do is break down the
multifamily underwriting process into
seven specific steps that you need to
hit every time you analyze a
multi-family deal so if you're looking
to buy a multi-family property on your
own or you're looking to break into real
estate private equity and work for a
multi-family investment firm definitely
stick around for this video
[Music]
now on this channel we talk about real
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time I release a new video now having
gone through the multifamily
underwriting process thousands of times
myself underwriting multifamily deals
throughout my career what I've found is
that many people get overwhelmed and
over complicate the process of actually
underwriting and analyzing a
multi-family investment opportunity so
by the end of this video you'll know 7
of the most important things that you
need to add to your next multi-family
acquisition analysis to make sure that
you're accurately valuing a multi-family
deal so let's start this off with number
1 and probably the most important piece
of what you're going to be analyzing and
that's your in place revenue and to get
that in place revenue you're going to
need a current rent roll that has a list
of all the tenants and all of the rent
and other charges that those tenants are
paying and you're also going to want a
trailing 12-month operating statement to
make sure that you know all of the other
income line items that have been
generated at the property like pet rent
and storage rent but you also want to
make sure that you can see what kind of
vacancy the property has experienced and
what kind of bad debt the property has
experienced as well now once you feel
confident with your in-place base rent
and the other income that you might
generate at the property the next step
is to figure out what your in place
expenses are at the deal and really what
you're trying to do here is make an
assumption about what your operating
expenses are going to be for the entire
duration of the time that you hold the
property and again in this case a
trailing 12-month operating statement is
what you need to figure out what
operating expenses have been and what
operating expenses might be in the
future now the biggest variable and
wildcard in your expenses is likely
going to be your property taxes because
oftentimes property taxes are reassessed
upon sale so make sure that you take
that into account based on the city
county state and country that you're in
to know what your property taxes are
going to be and how that's going to
affect your operating expenses while you
hold the deal
now once you've made your assumptions
about what your rent is going to be and
what your expenses are going to be the
third thing that you need to do is make
an assumption about what your
construction expenses are going to be so
many multifamily investors will go into
a multi-family deal with a plan to
renovate the common areas or renovate
the units at the property and with that
there are obviously associated cost with
that and you need to make sure that you
add that to your real estate financial
model so what that means is that you
want to make sure that you include any
sort of renovation expenses that you
might have any sort of hard and soft
cost that are included in that and also
the timing of all of those construction
expenses because that's going to affect
when you can actually push rents and get
those renovation premiums and that will
ultimately affect your investment
returns now once you have your revenues
your expenses and your construction
expenses the fourth thing that you need
to add is your assumptions for growth
rates and for vacancy rates so
specifically what do you think market
rent growth is going to be over time so
if you buy an apartment building in San
Francisco California if the average rent
per unit is twenty-five hundred dollars
per month five or seven or ten years
down the road from now that same unit
may be renting for three thousand or
thirty two fifty or thirty five hundred
dollars per month and you want to be
able to account for that in your real
estate financial model when you're
analyzing a deal same thing for your
vacancy expenses most apartment
buildings do not operate at 100%
occupancy so what is your vacancy rate
assumption going to be based on what
you're seeing in the market with
comparable properties and how you plan
to operate that property once you are
the owner of that deal now once you have
your market growth rate number five is
what are those post-renovation rents
that you can achieve once you actually
complete your renovation so again if
you're buying an apartment complex where
rents are $1500 per month and you
believe that by renovating the unit
interiors you can actually charge 1750
per month you need to include that in
your model as well as the timing of when
that's going to happen because that's
going to have a huge effect on your cash
flows and ultimately your internal rate
of return and cash on cash returns on
the deal now
once you've added all of those factors
into your model you have your operating
assumptions in place and what you need
to do now is move on to your financing
if you're planning on putting debt on
that deal
now most commercial real estate
investments including multifamily deals
are bought with some sort of debt on
that property and so including your debt
in your financial modelling is going to
be key to accurately projecting out what
your cash flows are going to be and what
your returns are going to be on the deal
so this includes things like your loan
amount your loan term your amortization
period your interest rate any sort of
interest only period that you might have
on the deal and also any sort of
refinancing assumptions if you think you
might refinance the deal three or five
or seven years into your whole period
now last but not least number seven
actually ties all of this together
everything that you've added to your
model up to this point and that is
solving for a valuation that actually
makes sense for you so if you were a
multifamily broker and you looked at ten
offers that you got on the same property
chances are you'd have ten different
amounts that each potential buyer is
willing to invest in that property and
the reason why is because every buyer
has different return expectations and
what they can pay for the deal is very
dependent on what those return
expectations are going to be so once you
have all of your assumptions in place
what you really need to do is come up
with a purchase price that's going to
give you the returns that you're
targeting so that could be a target
internal rate of return so maybe you
want a 12 percent IRR over a five-year
hold period or that might be a target
cash on cash return where you want an
average eight percent cash on cash
return over a ten-year period whatever
that is for you adjust that purchase
price based on those assumptions that
you made in order to create a valuation
that makes sense for you and a purchase
price that you feel comfortable at to
buy that multifamily deal so if you're
feeling overwhelmed about how to
actually analyze a multi-family deal
break it down into those seven steps
because those seven steps are really the
key things that you need to make sure
that you add to any multifamily
acquisition model now if you want to go
into any more detail on how to actually
underwrite a multi-family deal how to
work in a multi-family acquisition model
and how
- actually underwrite a multifamily
acquisition opportunity I'd recommend
checking out my course the complete
guide to multifamily real estate
investing where we go over the
foundations of multifamily investing all
of the key return metrics that you're
going to need to know and also how to
use a multi-family acquisition model to
analyze new multi-family acquisition
opportunities and we'll even go through
a case study in that course so if you're
interested in learning more there's a
link in the description below and you
can click that button to enroll in the
course now if you like this video make
sure to let me know by hitting that like
button subscribing to the channel and
sharing this with anyone else who might
find this helpful thanks so much.
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