Expense Underwriting

Curious to hear how other's firms underwrite expenses growth. The first firm I ever worked for underwrote expenses growing at 3% no matter what. Firm two would underwrite 3% for utility growth and 1%-2% for every other expense number. Total yearly expense growth was between 2%-3%. Rent growth could be 3%. So it was mismatched in a sense. These were also opportunistic deals where we had large rent premiums modeled as well.

 Curious to hear what everyone underwrites and how their firm looks at expenses?

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Comments (12)

Apr 15, 2021 - 6:52pm

Generally we're underwriting 3% for most categories that involve human labor (payroll, contracts, etc.), and 2% for others, with taxes based on geography. I'd say most acquisitions guys are underwriting 3% rent growth and 2% expenses in a stabilized market (currently u/w higher rent growth on deals we like due to COVID recovery), in multifamily at least.

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Apr 21, 2021 - 9:44am

Truth. A proforma is never right. That's part of why I have always felt the reliance on fancy models is overblown. The real question, in my mind, is where is the asset today, and where can it get to. Based on where it can get to, how long will it realistically take me to get there (if I can get it there at all). In my mind, we don't need these fancy models to know if a deal is strong or not. 

Apr 21, 2021 - 9:40am

2%-3% rent growth, 2%-3% expense growth.

Depends on the market. I'd say 50/50 between whether we underwrite revenues and expenses at the same inflation or higher rent inflation.

Apr 21, 2021 - 12:12pm

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