What do you include in your "back of envelope" underwriting
I'm curious to hear What other people include in their BOE analysis for large multi-family apts. Personally I just do entry and exit caps and GRM.
[{"id": "j0o0oh1", "text": "Following", "replies": [], "depth": 1}, {"id": "j0o18ka", "text": "Personally I do 50% expense ratio - expected debt service.\n\nIf it hits the 1.5% rule there then I take a deeper look at underwriting.", "replies": [{"id": "j0oa4n5", "text": "I hate expense ratios with a passion. Dig into Op-Ex a bit and get a better estimate", "replies": [{"id": "j0oseyl", "text": "Just a quick a dirty way to estimate expense. I know multifamily OpEx hovers around 30-60%", "replies": [], "depth": 3}, {"id": "j0pj9hr", "text": "That's funny, I find expense ratios to be invaluable.\n\nYou only need 3 or 4 points of data to get them very accurate.", "replies": [{"id": "j0pw1sf", "text": "What are those 3 or 4 data points? I don\u2019t do MF but I\u2019m curious how you nail this down with these data points?", "replies": [{"id": "j0qocrq", "text": "Vintage\n\nAre taxes/insurance in line with standards \n\nUtilities ... Who pays for what \n\nYou're going to fall in the 35-55%.  Once you can zero in on those numbers you can narrow it down to within 5%.  Err on the high side.  If the numbers still look good, investigate.", "replies": [{"id": "j0s9r6v", "text": "Very interesting. I'm a student who likes to model deals on the market sometimes purely out of education.\n\nCould you expand on how you're able to narrow it down to a 5% error margin? I'm assuming the older the property, the higher the OpEx ratio. \n\nHow would you know if taxes and insurance are in line with standard?", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "j0oamj7", "text": "What is the 1.50% rule? I haven't heard of this before.", "replies": [{"id": "j0oqquq", "text": "1.5 DSCR", "replies": [], "depth": 3}, {"id": "j0orriw", "text": "I'm assuming monthly rent is 1.5% of purchase price?", "replies": [{"id": "j0qgo1r", "text": "This is it.", "replies": [{"id": "j0rlv08", "text": "Wow, that is nowhere near possible in my market. Interesting.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "j0q6a43", "text": "Lol.  You are kidding yourself.  You aren\u2019t buying shit in a core market with a 50 percent expense ratio unless you slap a BS cap rate or outsized rent growth!  Get real \ud83e\udd23", "replies": [{"id": "j0qgr75", "text": "I know it\u2019s aggressive but it\u2019s how I make sure my deals will cash flow.", "replies": [], "depth": 3}, {"id": "j0sabcu", "text": "Not sure why you're downvoted. The market has gotten pretty aggressive as of late.", "replies": [{"id": "j0sarcy", "text": "Lol.  Passive folks who aren\u2019t engaged in the market  and don\u2019t have a clue!  28-32 percent expense weight for trophies modern assets and 40 percent for older vintage!   I am talking, DC, Denver, Boston, Seattle, etc.\n\nYou have to be a basis buyer and using such expense weight doesn\u2019t work!! Anywhere\u2026 maybe in the sticks or Midwest like Kansas City!", "replies": [{"id": "j0t6lev", "text": "Haven\u2019t been looking at active deals in the market but where are you using Class A/B multifamily cap rates at?\n\nI\u2019m assuming a 75 bps expansion from 4 months ago?", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}, {"id": "j0rga6k", "text": "I like this approach! And agree with other comments as I find larger MF 100+ units to have proforma expense ratios in the 35-55% range. Depending on state, obviously required to adjust for potential taxes and crazy insurance increases these days. Thanks for sharing!", "replies": [], "depth": 2}, {"id": "j0sa3yk", "text": "One important think is that a 1.50% rule may be deceiving if you think about the broader risk/return spectrum. The 1.50% rule very roughly translates to a 9% cap investment. \n\nClass A multifamily and industrial were selling near 3.50-4.00% cap rates 5ish months ago. At these rates the 1.50% rule may not hold up but that does not necessarily make them bad investments.", "replies": [], "depth": 2}, {"id": "j0t59ww", "text": "Where can I find a list of these \"rules\"?", "replies": [], "depth": 2}], "depth": 1}, {"id": "j0o6mog", "text": "I'm after the cash-on-cash return, so my BOE (quick and dirty excel spreadsheet) has purchase price, guesstimate for reno, current/proforma monthly rents, and then mgmt, vacancy, and maintenance at generalized percentages. Also taxes (most recent) and insurance (guesstimate). If the COC hits a certain point on this spreadsheet I will take a deeper dive.\n\n\nIt sounds very involved but usually takes a few moments to input the data points for a property. Also, an ARV gets calculated based on market cap rate.", "replies": [{"id": "j0odpu0", "text": "Sounds quite in depth. If that's your BOE I'm curious to know what's in your full underwriting.", "replies": [{"id": "j0p3k55", "text": "All that plus a month-by-month breakdown of expected rents for 5-7 years (units are listed in order of turnover and there are built-in rent increases), more in-depth debt service calculations, cash layout including closing costs, reserves, and furnishing costs (if applicable), GP/LP payout, and seven year cash flow stats. The quick and dirty is a one-page excel spreadsheet wherein I use 2-4 columns, the full underwrite is 4 pages of tied-together calculations and data.", "replies": [{"id": "j0sxs2g", "text": "Wait so you underwrite each lease individually? Does it slow down the model a ton?", "replies": [{"id": "j0t0dj6", "text": "I use the rent roll to enter each unit into my spreadsheet in order of expiration. It takes longer to do it than just using overall rents, but it's more accurate underwriting since it includes realistic turnover times. And this is my in-depth UW that I send to buyers, so I need to be pretty spot on. The rollover of increases is a little more generalized since I don't want to rework my spreadsheet every time, but between the fact that later turnovers should be higher anyway and the fact that my annual increases are pretty conservative, I figure it's \"close enough\" at that point. \n\nTo be fair, I haven't implemented this for anything over ~50 units, but I imagine it would be worth the legwork on a bigger sale.\n\nMy whole MO is trying to be incredibly valuable to my buyers and save them a lot of the trouble.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "j0o9xh0", "text": "Basis, NOI, annual Debt Service, Year 1 stabilized CoC, and the exit price", "replies": [], "depth": 1}, {"id": "j0piv8s", "text": "1% rule.\n\nIf that checks out ... dig in and find out how much higher I can get it, what its going to cost, and exit price.\n\nIf 1% is way off, why ?\n\nIf the why is compelling, dig in.\n\nInitial analysis takes anywhere from a few seconds, to maybe 1 to 2 min and then on to the next.\n\nEDIT - this is more of a sniff test ... then it would be onto back of the napkin numbers if it makes it past", "replies": [], "depth": 1}, {"id": "j0poopg", "text": "Cap and $/door\u2014metrics that are not a function of financing.", "replies": [], "depth": 1}, {"id": "j0si3lh", "text": "Strong real estate, 30% opex, $/door and cap rate. Can\u2019t lose.", "replies": [], "depth": 1}, {"id": "j11rq9f", "text": "Im in hotels and methodically use:\n\nPrice per key\nRevenue per door\n\nGross rev X \n\nCap rate\n\nDebt yield \n\nIf they check I move onto the model. Trust your gut \ud83d\ude09", "replies": [], "depth": 1}]