How to underwrite MultiFamily Investments
I was recently hired at a National Brokerage firm in Nashville Tennessee with little/no experience in underwriting Multifamily investments.
My question is:
What is the best way to learn to underwrite Multi-Family? The firm provides little to no guidance therefore I am basically teaching myself.
We receive many rent rolls/P&L's from potential clients however there is often information missing such as loss to lease and vacancy records.
They have suggested that I attempt to do as many properties as possible until I understand the process.
Does anyone have any suggestions/resources to begin learning?
Thank you,
Good luck eroding the CBRE and JLL market share there... they've done 75% of the deals over $10 mm in that market in the last five years.
Otherwise just look around here, this question has been asked and answered about a million different times.
What I want to do is say that MF is confirmed past the peak for godsake look at the OP's post. But for some reason if I say something slightly mean (read: accurate) and go back to edit my post due to typos I make all the time I can't and it says "Edit-Abuse Comment". I don't think I'm a dick but maybe #WSO does! ......
What in the world are you trying to say, haha?
He's trying to say that it's alarming that the CRE market is on-fire to the point that a brokerage firm with National presence would hire someone with zero CRE underwriting experience to presumably lead the team's underwriting while providing little-to-no training. Subsequently, he was complaining about a technology issue unrelated to your post, about a mean undertone that he wanted to make as an edit to his original reply to your post.
TLDR, he thinks the MF market is screwed and is not happy with the blog's functionality ;)
But in all seriousness, multifamily is not terribly difficult. This is an oversimplification, but basically you need to make a turnover/vacancy assumption based on a combination of market and historical performance at the project if it's stabilized. If it is in lease-up, you have to use a combination of market vacancy/stabilization time-frames along with the pre-leasing/absorption they've been doing at the property assuming there's some track record. For the rents themselves, make sure you know if the rent roll you've been given is showing effective rents or gross rents (with/without concessions factored in). This is critical. Then factor in comps vs. in-place/historical rents. Layer in your other income (parking, etc.). The expenses are the tough part as some firms can operate leaner if they are experienced/have economy of scale. Agree with below post in regards to the property taxes.
Honestly, MF is the easiest asset type to underwrite. You take a snapshot of the rent roll and project it over the next twelve months for the revenue side. Compare to the trailing-12 revenue number just for S&G
Expenses are taken from trailing-12 operating numbers and the only thing you usually scrub is the property taxes, especially in a sale/acquisition scenario, since they are often re-assessed by the local municipality based on the current sales price.
There is no ARGUS run required. It can basically be done with some basic charts that can be re-used over and over again.
If you're working for a brokerage firm that also has an appraisal arm, ask them to share their template they use to come up with the proforma NOI. If not, just look at some appraisals and flip to the Income Approach to Value section and find the page with the as-stabilized NOI calculation. Then re-create the basic format in excel and set-up a formula to subtract the expenses from the revenue and now you have NOI. Divide that by another cell where you can enter/adjust the cap rate and now you've got an estimated value.
Once you learn that, come up with some good ways to compare the rents
Shoot me a PM and I'll try to help a little more.
@CtrlD" MonkeyWrench Thanks for the run down on underwriting MF properties. Just out of curiosity though, what would you say is so much different from that with respect to office/retail/industrial. Is it just lease structure (i.e, tenant improvements for office, revenue sharing for retail) or does it have to do with submarket and location analysis as well? Possibly different financing structures for different asset types?
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