The Most Important Things I’ve Learned About Underwriting Multifamily Deals

The Most Important Things I’ve Learned About Underwriting Multifamily Deals

2 min read
Sterling White

Sterling White is a multifamily investor, specializing in value-add apartments in Indianapolis and other Midwestern markets. With just under a decade of experience in the real estate industry, Sterling was involved with the management of over $10MM in capital, which is deployed across a $18.9MM real estate portfolio made up of multifamily apartments. Through the company he founded, Sonder Investment Group, he owns just under 400 units.

Experience
Sterling is a seasoned real estate investor, philanthropist, speaker, host, mentor, and former world record attemptee, who was born and raised in Indianapolis. He is the author of the renowned book From Zero to 400 Units and the host of a phenomenal podcast, which hit the No. 1 spot on The Real Estate Experience Podcast‘s list of best shows in the investing category.

Living and breathing real estate since 2009, Sterling currently owns multiple businesses related to real estate, including Sterling White Enterprises, Sonder Investment Group, and other investment partnerships. Throughout the span of a decade, he has contributed to helping others become successful in the real estate industry. In addition, he has been directly involved with both buying and selling over 100 single family homes.

Sterling’s primary specialities include sales, marketing, crowdfunding, buy and hold investing, investment properties, and many more.

He was featured on the BiggerPockets Podcast episode #308 and has been contributing content to BiggerPockets since 2014, with over 200 posts on topics ranging from single family investing and apartment investing to mindset and scaling a business online. He has been featured on multiple other podcasts, too.

When he isn’t immersed in the real world, Sterling likes reading motivational books, including Maverick Mindset by Doug Hall, As a Man Thinketh by James Allen, and Sell or Be Sold by Grant Cardone.

As a thrill-seeker with an evident fear of heights, he somehow managed to jump off of a 65-foot cliff into deep water without flinching. (Okay, maybe a little bit…) Sterling is also an avid kale-eating traveller, but nothing is more important to him than family. His unusual habit is bird-watching, which he discovered he truly enjoyed during an Ornithology class from his college days.

Education
Sterling attended the University of Indianapolis.

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What are some of the most important things to look at when evaluating multifamily property investments?

If you’ve been following my journey, you know that I began adding multifamily apartment buildings to my portfolio last year. While there are many similarities to single family property investing, there are some new terms and quirks to learn. Below are some of those I’ve found most important.

How Utilities Are Paid

Utilities are a whole different beast when you move into the multifamily investing world. You need to know who is paying them, what their status is, and how to handle a float to make sure the lights stay on. In a multifamily project, you might have community utilities such as a pool, lobbies, security office, laundry, and exterior lighting. That’s all in addition to keeping on top of individual units. Depending on how big your property is, you could have a $12,000 to $24,000 light bill each month. And don’t forget water, sewer, and trash removal. You need a reserve to be able to keep up with these bills, even if the rent isn’t coming in. Getting the lights or water shut off in a community can create a monumental level of financial and legal issues. At the property my partner and I recently acquired, we’re billing the tenants back for the utilities. This helps our bottom line, which ultimately increases the value of our property.  

landlord-lessons

Related: How I Bought a Multi-Million Dollar Apartment Complex at the Age of 26

Location

Where will the tenants come from to fill this property? Make sure you are not relying on one employer for your rents—because you never know what could happen. If you have multiple employers around your property, that helps mitigate your risk in the event one decides to relocate or simply shutdown.  

Rents

Take a good look at current versus market rents. There could be great value to be uncovered there. You may also have to be patient and be prepared to soak up some costs if current tenants have long leases at out of date rates. Once those leases expire, you can gradually increase the rents to market rates.

Cap Rate

Multifamily properties are typically compared and sold based upon cap rates. That is the NOI divided by the current market value or seller’s asking price. In order to accurately calculate the cap rate, you must know these values. You must research them yourself. The lower the cap rate is, often the more desirable the property and or location is. If the cap rate is up between 11-13%, then you’re most likely in a questionable area.  

apartment-value

Related: Should You Invest in a Small or Mid-Sized Multifamily Deal? Get the Pros & Cons Here!

NOI

Net operating income (NOI) is your cash flow from all rents and other income producing services (like laundry) after subtracting your operating expenses, including property management. There may be significant room for improvement here if you can get the expenses down and increase the income.

T-12

Obtaining these financials is very important because they break down the actual income and expenses of the building over the last 12 months. Purchasing a property on actuals is ideal versus a pro forma.

What are some of the things you’ve learned about multifamily investing? What are some things you’d like to know? 

Weigh in with a comment.