How did you learn underwriting?

Question

Hello, I am new to this world and I am curious about how you learned to underwrite correctly? And how did you Learn to calculate a offer? I trying to learn underwriting now but I do not believe I am doing this correctly and I hear on the podcast that many people put in offers below asking and I do not understand how they calculate their offers.

Drew Sygit · Answer

Practice!

Find a thorough spreadsheet and start running numbers.

Then share here and ask what you missed.

Doug Smith · Answer

That's a really good question that will help others. For me? I was a banker/lender for at least 15 years before I purchased my first investment...a flip that had about $35K of rehab work. It was a basic flip in a working class neighborhood. With that flip, I had a partner that had done it before. I knew the financial and financing side inside and out, but I didn't know the contruction side. My wife has design degree, so she knew the process. The parter knew things that I didn't. We hired a general contractor with a good track record. I did some painting and did all the landscaping myself. Having that financial background and in conjunction with that partner and the GC, I was able to put together a multi-page/sheet Excel spreadsheet to help. Through the next few flips, I/we learned how to "back into a strike price.". Basically, we start with having the realtor do a CMA to come up with a conservative ARV. We then back out our desired profit, the rehab budget, the time-value-of money for the desired return, interest and carrying costs, permitting, architectural, etc...and also make sure to add a "contingency reserve of 5%-10% for unexpected expenses, that gave us the hard "strike price", which is the maximum price the math will allow us to pay for the property. You also have to consider other factors like local permitting rules and timelines, the FEMA 50% rule, and other considerations. You learn mainly by doing, but most importantly make sure you have a partner or support to fill in those knowledge gaps that you might have. There is a difference between being stupid and being ignorant. Being ignorant means you don't know what you don't know. Being stupid means you recognize that you don't know something, but you try to do it anyway. Find a good partner with knowledge before you try to go it alone. That is my humble advice. I wish you well.

Joel Miller · Answer

Underwriting for this purpose is something that you just get good at as you do it. the best way to learn the mechanics of it are with materials you can find on the subject where you can put a pencil to some methods. The podcasts (and I am a frequent guest on them) will give you some basic understanding, but roughing out deals for practice will prepare you better. I cover all this in my book "Build Real Estate Wealth: Enjoy the Journey of Rental Property Investment."

Bryce Jamison · Answer

Great question!

High level, it's simple. You take your presumed rental income and subtract ALL of your expenses. Where people (me, I'm people) mess up is they over estimate rent, underestimate expenses, and don't include expenses outside of PITI. Not only do you have to account for the mortgage payment, but you need to factory in routine maintenance (OPEX), long term expenses (CAPEX), vacancy, & property management fees.

I use the BP calculator to do all of my underwriting. It's very user friendly and easily allows you to manipulate the numbers to see what it would take to make a deal work. I use standard percentages for the variable expenses and Zillow, plus first hand experience, to estimate rents (for LTRs). The homes on Zillow getting a lot of contacts and applications may be priced on the lower end, while the ones with no contacts are on the higher end.

I also stay in close contact with my lender to ensure I'm using accurate interest rate info. The rate can change +/- 0.1-0.2% everyday, so you have to account for that when running your numbers.