This is a series on Multifamily Underwriting. If you haven’t read from the start, go back there now. Now that you’ve done your initial evaluation, it’s time to go on to the secondary evaluation. This one is quick, too. It should take you 5 minutes or less for each property.
With this step, we will calculate some basic metrics and assess them against our minimum requirements. If it fails anywhere, then you should consider dumping the property and moving on. I won’t go so far as to say you must dump it because we are getting into the area that needs some intuition, but the more fails it has, the more likely it should be dumped. Keep a low threshold to get rid of them; there are many properties out there. You want the great ones, not the just-good ones.
The Secondary Evaluation
This is a great time to use my Multifamily Quick Spreadsheet. Send me an email and I’ll hand it over. Here’s part of it:
You put in the demographics, then consider your minimum requirements, in the case of price per unit and vacancy rate, it’s the maximum. Then you go down the spreadsheet inputting information that was given to you by the seller in a brochure or online or elsewhere. There’s also information on the type of loan you are getting and what sort of rehab you are planning to do. Also very important is what the rent is now and what the market rent is once rehabbed. Here’s a list of information you’ll need:
- Offer price (what you will pay; start with the asking price in the spreadsheet and change as required by your numbers to find the price you are willing to pay)
- Number of units
- Scheduled rent (this is what they are getting right now. Don’t worry about vacancy here)
- Market rent (you’ll need to calculate this or ask your agent or property manager)
- LTV (Loan to Value), Interest rate, Amortization – stuff from the bank
That’s all you need. There are a few extras in there, but are not required. Once all the numbers are put in, you might get something like this:
This shows you at a glance what your returns look like (this is an 8 unit property with a $600,000 sales price. You can adjust the numbers to see what happens. This project is under water upon purchase but if the rehabs are done, it makes a nice return. The price per unit is a little higher than what I’d like but this passes the test if I think I can do the rehabs quickly. See – there is some subjectivity and many assumptions. This one is worthy of going to the next phase.
As a reminder – this should take no more than 5 minutes for each one. You still haven’t contacted the seller yet or viewed the property. You are still weeding out bad deals and letting the good ones rise to the top. Next week we will start the real underwriting.
