Seeing Apartment Deals More Clearly

Simplistic underwriting is where you determine if the deal is a no brainer or not.

Once you’ve determined the quality of the deal construction, location and sponsorship team, fit everything on a single sheet of paper for why you’d invest in the deal.

If it’s not obvious to invest, and takes a massive spreadsheet projection to force the return you want, pass on the deal.

When you fit everything on one piece of paper, you’ll also condense what actually matters in the deal and leave out what doesn’t matter as much. You can work through what could go wrong in a way that's not just in rows or columns. Remember that it's not the hardest blow that knocks you out; it's the one that hits you when you're not expecting it. Having a free canvas like a piece of paper or whiteboard helps me think.

This will further aid you in seeing a more accurate picture of the deal. You can look at it more as an apartment complex rather than numbers on a spreadsheet.

Here's the core of what all underwriting comes down to. There's a place for the advanced spreadsheets, but most of those spreadsheets only seem complicated because they've labeled the expense categories fancy names.

Break even point: (expenses + annual cost of debt) / gross potential income. Once you find this break even point, compare it to your day one occupancy. Note the percentage spread. This is your margin of safety. Do research into how your market was affected in the last recession. Would this deal survive that economic environment and still have some margin of safety?

If you think you can raise rents on the deal from a renovation, estimate a renovation budget and add it to your down payment. Then add the rent increase to your NOI.

I use this style of underwriting as a first pass. If I like the deal, second pass would be getting the financials from the broker, analyzing them in depth, getting insurance quotes, researching comps, filling out a full property analyzer spreadsheet, etc.

To me, doing this is fun. I've done it every night for about 5 years where I may have missed 6 days. There's an abundance of deal listing for you to underwrite.